Comtech Comes Through With Big Contract Wins

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When I made Comtech Telecommunications (NASDAQ:CMTL) my inaugural SGS pick on June 10, I cited the anticipated Movement Tracking System contract extension as a major reason for my recommendation. Last week, Comtech finally came through with the long-awaited news: a $605M contract that extends the MTS relationship with the Government through 2010.

But the company actually did one better: it announced a brand new, $216M contract to supply the Government’s Blue Force Tracking program through 2011. Both these contracts are of the “indefinite delivery/indefinite quantity” nature, meaning that there is no pre-arranged timing for orders within the contract time period. However, Comtech will start to cash in immediately as it received a $53.3M order against the Blue Force contract several days after it was announced.

So how did the market respond to $821M in contract wins for a company with 2006 revenue of less than $400M? Pretty muted, as the stock rose only 3.4% on the day of the big announcement. It has since trickled up about 6% as the major indexes have rallied, but is still below its July highs.

I believe that the magnitude of these contracts is not being fully appreciated, and that the stock has more upside. Not only does Comtech have an impressive history of growth and exceeding earnings expectations, but it has a rock-solid balance sheet with over $7/share in cash. AG Edwards analyst Mark Jordan estimates that if the company spent that cash on acquisitions and “earned its typical return on sales,” it would bring in an additional 25 to 40 cents a share in annual earnings per share.

I continue to be a confident and optimistic holder of Comtech shares, and will look to pick up more on any dips.

Disclosure: SmartGuyAB is long CMTL.

CMTL 1-yr chart: