CMTL - Comtech Telecommunications: Intriguing Valuation Metrics But Volatile EPS And A Volatile Stock

2023-07-19 19:17:57 ET

Summary

• Space stocks, including Comtech Telecommunications, have underperformed in 2023, with the Procure Space ETF only up by 3% compared to the S&P 500's 20% rise.
• Despite some earnings improvement and technical support, CMTL's negative GAAP earnings over the past four quarters and uncertain growth outlook raise questions about its future performance.
• CMTL's stock is considered modestly undervalued and is bouncing off support, but negative free cash flow and an uncertain growth outlook pose challenges for potential investors.

Space stocks have not taken off this year. The Procure Space ETF (UFO) is higher by just 3% in 2023 while the S&P 500 is up about 20%. With a steep underperformance in the last 52 weeks, many names, big and small, in the satellite communications niche have struggled amid high volatility.

Comtech Telecommunications (CMTL) is one such name. Today, I am upgrading the stock to a hold from a sell based on some earnings improvement and technical support, but key questions remain.

Space-Related Equities Producing Negative Alpha in 2023

According to Seeking Alpha, CMTL together with its subsidiaries, designs, develops, produces, and markets products, systems, and services for communications solutions in the United States and internationally. It operates in two segments, Commercial Solutions and Government Solutions.

The New York-based $257 million market cap Communications Equipment industry company within the Information Technology sector has negative GAAP earnings over the past four quarters and does not pay a dividend. Following its Q3 earnings release last month, the stock has a high 43% implied volatility percentage and a low short interest of 0.9%.

Back in June, CMTL reported Q3 revenue of $136 million, a 12% increase from the same period a year earlier. It was also a modest beat while cash flow from operations was in the black. Third quarter adjusted EBITDA verified at $12.5 million. While net sales are seen as rising in FY 2023, Comtech’s gross margin is expected to continue falling this year while net bookings for its services may decline. This growth mosaic is not all that encouraging. But is the stock a buy on valuation today? Let’s dig further.

CMTL: Weaker Gross Margins A Risk

On valuation , there are some compelling metrics, but the earnings trajectory leaves something to be desired from the bullish perspective. With 2023 wrapping up, the focus is on the out year. 2024 per-share profits are expected to be much higher than the current FY. $0.71 of EPS would compare to a 2023 estimate of $0.41 of operating earnings per share. If the company can hit its $1 consensus EPS figure, that would be impressive to me.

That looks good, but we must acknowledge that EPS was sharply better from 2018 through 2021, so the growth outlook is not that thrilling to me. What’s more, the tech firm’s free cash flow per share is solidly in the red at -$0.97 over the last four quarters. I would like to see improved FCF trends given the sketchy growth forecast.

CMTL: Earnings Growth Outlook Improving, But Volatile

If we assume EPS of $0.71 in the next year and apply a market-based non-GAAP price-to-earnings ratio of 19, then the stock should trade near $13.50. I assert an earnings multiple below the sector median is appropriate given the uncertain growth picture. What’s more, if we used trailing earnings, then the stocks’ valuation would be much lower – closer to $9.50 using $0.41 and the company’s 5-year average historical operating P/E of 23. So, perhaps the stock is a bit undervalued, but it is not a definitive screaming buy.

CMTL: Some Favorable Valuation Metrics

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q4 2023 earnings date of Thursday, September 28 AMC. No other volatility catalysts are seen on the corporate event calendar.

Corporate Event Risk Calendar

The Technical Take

CMTL shareholders have endured quite the roller coaster ride over the past years. Since I initiated coverage on this small company, shares have found support at my noted $9 level, but then a massive rally that I admittedly did not see coming over the final months of last year and into early 2023 ensued. Notice in the chart below that CMTL just about doubled from its June 2022 nadir to the $16.87 multi-month peak notched in early February this year.

Overall, though, the flat 200-day moving average implies that there is no clear trend in price action. The good news for the CMTL bulls is that the stock has once again bounced off support just under $9. I see near-term resistance at $10 – that is the early May peak and where the stock was rejected on a June rally just recently. So, I see the current price of $9.22 as being in a bit of a no man’s land. Given the close proximity to support, I would lean bullish, but placing a sell-stop order under $8 is a prudent risk management strategy. A breakout above the May peak of $12.55 could result in a test of the year-to-date high.

CMTL: Holding Key Support, Resistance Near $10

The Bottom Line

I am upgrading CMTL to a hold from a sell. The stock is likely modestly undervalued, and shares are bouncing off support, so there are some reasons for optimism, but negative free cash flow and an uncertain growth outlook are question marks for the bulls.

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