Comtech Comes Through, Loud and Clear

• ByJonathan Moreland, RealMoney Contributor
• On 4:00 pm EDT, Wednesday September 30, 2009

One bad quarter for a firm often begets another, but not at Comtech. Lowered guidance in Comtech's second-quarter (ended Jan. 31) conference call clobbered its shares earlier this year, giving both insiders and me a great buying opportunity.

But with the recent release of Comtech's fourth-quarter results (ended July 31), the firm has successfully avoided disappointing investors again. To the contrary, management raised expectations for next year.

Comtech makes satellite transceivers as well as the larger systems that tie them together to form a mobile communications network. The firm supplies both commercial and military markets with its wares, but the ongoing hostilities in Iraq and Afghanistan have made the U.S. armed forces Comtech's largest customer of late. The company has two contracts with the military: Its Movement Tracking System assists the military with logistics communications, and the Blue Force Tracking System assists in battle command.

A Raise From Management

Revenue for Comtech's fourth quarter came in at 122.0 million. That was down 3.6% year over year and off 5.1% sequentially, but it beat expectations. So did earnings per share (EPS). Earnings of 21 cents were 3 cents greater than the average analyst estimate.

For the full year, EPS of $1.73 still ended up in the ball park of the lowered guidance management disappointed investors with earlier this year. But management raised guidance for fiscal 2010 this time around. The company now expects to post EPS of between $2.10 to $2.20 in its fiscal 2010, on revenue of $820 million to $840 million. That's solidly higher than the average analyst estimate of Comtech earning $2.01 per share on less than $800 million in sales in the coming year. Hitting the low end of guidance would also equate to top- and bottom-line growth of 40% and 21%, respectively.

Earning $2.15 or so in fiscal 2010 would still represent a decline from the company's peak earnings in fiscal 2008 of $2.76, but at least the bottom line seems once again to be headed in the right direction.

All this good news translates into me keeping Comtech's stock rated a buy in my InsiderInsights newsletter. But clearly, my present buy rating holds less upside potential than when I first entered this stock. And although I feel the risk in the stock is lower now compared with last March, given the firm's execution over the past two quarters, no position is bulletproof. Any reconsideration by the present administration of the value of engaging militarily in Afghanistan would deal a heavy blow to Comtech. A plain old market selloff would also no doubt bring out the profit-takers in this winning position as well.

Both of these factors are out of the company's control, however. What is in management's control -- cost containment, new revenue generation and realistic guidance -- has been executed well since the firm warned investors of slower business earlier this year. I see no reason to doubt management's ability to continue doing so, now that there are signs of economic stabilization. What has been missing is an opportunistic, accretive acquisition. But given the firm's capital raise back in May, I wouldn't be surprised by the announcement of one in the next two quarters.

Sell-side analysts have varied opinions on Comtech's shares at this point. While two raised their price target after the fourth-quarter results (one to as high as $45), another analyst downgraded the stock on the basis of it being fully valued right now. I think the progress in Comtech's fundamentals favors the high-end target, while a belief that CMTL is fully valued assumes a sudden halt in revenue growth. Again, I see no reason to be so pessimistic, especially in the face of continuing announcements of new orders.

Good, Until Proven Otherwise

I will be keeping tabs on Comtech's insiders, however, particularly the three execs who caught our attention earlier this year with their bullish trades. Two of the trio are already not bound by short-swing trading restrictions, which stop insiders from both buying and selling their company shares within a six-month time period. The last of the cadre will be free to sell on Oct. 21. All three of the buyers earlier this year made large options-related sales back in June 2007, when Comtech's shares traded for just over $41. These executives appear to be traders, not cheerleaders for their stock. So it'll be interesting to see at what price they finally decide to pocket some gains.

Technically, CMTL appeared to have managed a breakout last week above important support in reaction to the firm's fourth-quarter results. But the stock is retesting supports now. Given the fundamental improvements at Comtech, I expect this test to be resolved bullishly.

Let me be clear, though. I am very cautious about the ability of indices to continue powering higher without a pause, given the tremendously bearish stats that the overall insider trading data I follow have been generating for weeks. I am on notice to take profits in my winning positions if and when their charts start to break. That could be for either company-specific reasons, or just the result of being brought down in a larger market selloff.

But there is no way of knowing if a market pullback might start next session, next month, or ever. And it has made no sense to me to sell out of well-performing stocks out of either fear or one's perceived ability to see a short-term market top before it happens. So until the fundamentals or technicals of solid firms like Comtech start flashing specific red flags, the green light remains on for their stocks.

Buzz up!