Investment Thesis
Comtech Telecommunications Corp. (NASDAQ:CMTL) is an American communications infrastructure and solutions provider headquartered in Melville, New York. In this thesis, I will analyze the company’s recently announced first-quarter results and its future growth prospects. I will also be analyzing its valuation at current price levels and the upside potential in the stock price. I believe CMTL has managed to grow its revenue significantly and on a consistent basis. The new contracts awarded to the company provide a healthy order book and revenue visibility for FY24-25, and hence, I assign a buy rating for CMTL.
Company Overview
CMTL is a leader in providing advanced communication solutions that address the complex problems faced by government and commercial customers in the telecommunications industry. It specializes in the design and production of satellite communication systems, including earth station equipment, modems, and amplifiers. These solutions cater to a diverse range of applications, such as military, government, and commercial communications. Its network technologies include advanced routing and switching solutions, as well as managed services that ensure the reliability and security of communication networks. CMTL has a diverse customer base, including government agencies, defense organizations, and commercial enterprises.
Q1 FY2024 Result
CMTL posted strong first-quarter results, with significant growth in revenues and expanding operating margins. As per my analysis, the Satellite and Space Communications segment proved to be the outperformer, with a solid 26.6% revenue growth y-o-y. I believe this segment will continue to grow at a fast pace given the technological edge that it has, especially in the satellite communications industry, which is leading to a stronger order book for the company.
Investor Presentation CMTL
It reported net sales of $151.9 million, a significant 16% compared to $131.1 million in the same quarter last year. As I mentioned earlier, the Satellite and Space Communications segment was the primary revenue driver, with an increase of 26.6% to $102.4 million, compared to $80.9 million in Q1 FY23. However, the Terrestrial and wireless Networks segment experienced a decline of 1.6% to $49.5 million, compared to $50.3 million in the corresponding quarter last year. Even with a decline in revenues, I have confidence in the Terrestrial and wireless Networks segment, given its potential to cater to the 5G communication technology globally. The 5G technology has not been completely adopted by countries globally, including the U.S. and Asia Pacific, presenting a great opportunity that CMTL can utilize in the coming years. The growth potential is reflected in the record net booking that it received in the last two quarters at $57.1 million and $48.4 million in Q4 FY23 and Q1 FY24, respectively. It reported an operating profit of $2.08 million, compared to a net operating loss of $9.7 million. This improvement in the operating margins was the result of reduced research and development costs and high revenue growth. CMTL reported a net loss per share of $0.11, compared to a net loss per share of $0.46 in the same quarter last year. The net decline in net loss was primarily driven by improved operational income, partially offset by higher interest expenses.
Overall, the company managed to outperform in multiple parameters, including revenue growth and operational efficiency. The company is on a solid growth track, and it is reflected in the Q2 FY24 guidance by the management. It estimates the Q2 revenues to be in the range of $153.5-156.5 million, representing a y-o-y increase of 17% on the higher end. The adjusted EBITDA margins are expected to be in the range of 11%-13%, compared to the Q1 FY24 margins of 12.1%. I believe it should be able to achieve these targets given the record contracts awarded to the company during Q1, which include a U.S. Army Contract with a $544 Million revenue Ceiling and a $20 million order from the U.K.’s spectra group.
Key Risk Factor
High Debt Obligation: As of October 31, 2023, it reported cash and cash equivalents of $18.1 million against the debt obligation of $203.8 million. The high debt obligation is putting significant stress on the balance sheet and could impact its future fundraising as it could have a negative impact on its functioning. The high debt obligation has also resulted in a significant increase in the interest expenses, with the Q1 FY24 interest expenses of $4.9 million, up a massive 121% compared to $2.2 million in the same quarter last year. The higher interest expenses are putting a dent in its profit margins. I would recommend investors consider this risk before investing in CMTL.
Valuation
CMTL is currently trading at a share price of $8, a YTD decline of 35%. It has a market cap of $221 million. It is trading at a forward non-GAAP P/E multiple of 8.25x, with an FY24 EPS estimate of $0.94. Comparing this to the sector P/E of 24.9x, I believe it is significantly undervalued at current price levels. With a long-term view of 3–5 years, the stock could provide stellar returns. The market reacted negatively to the Q1 results, and the stock price witnessed a steep decline. I believe this is a great opportunity for investors looking for a growth company at a low valuation.
Conclusion
The consistent revenue growth rate, coupled with improving profit margins, indicates that the company is on the right track. The record order book and optimistic guidance by the management instill significant confidence. It is trading at a cheap valuation with a forward P/E multiple of 8.25x. The company faces the risk of high debt obligation, but the overall profile provides a favorable risk-reward profile. Considering all these factors, I assign a Buy recommendation for CMTL.
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