NEW YORK (AP) -- Shares of Comtech Telecommunications Inc. surged Monday after a JPMorgan analyst raised his rating on the company's stock, saying it "looks oversold." He noted there are opportunities for Comtech to reduce costs during what's expected to be a challenging business environment.
THE SPARK: Analyst Joseph B. Nadol III raised his rating on Comtech to "Overweight" from "Neutral."
THE BIG PICTURE: Comtech, which makes equipment used in satellite and other mobile communications systems, predicted last week that its fiscal second-quarter performance will be significantly weaker than the first quarter. It forecast earnings per share between 10 cents per share and 15 cents per share. For 2013, it predicted earnings to range between $1.26 per share and $1.34 per share.
Nadol lowered his second-quarter earnings forecast to 13 cents per share from 32 cents per share and fiscal 2013 earnings to $1.23 per share from $1.48 per share.
The Melville, N.Y., company said customers are uncertain about what may occur if Congress fails to reach a budget agreement. Without one, automatic tax increases and government spending cuts will take effect on Jan. 1.
Analysts surveyed by FactSet have predicted second-quarter earnings of 17 cents per share and fiscal 2013 earnings of $1.27 per share.
THE ANALYSIS: Fundamentals are weak in the telecommunications business primarily because of fewer sales of satellite modems to the federal government. Comtech management expects its profits to improve in the latter half of the fiscal year, Nadol stated.
"While we do not have much visibility on the bounce in orders required to drive this recovery and we could envision another shortfall, we see the risk/reward in the stock as quite favorable," he wrote in a research note to clients.
The analyst said that Comtech management has "significant opportunity" to take out some additional corporate costs to offset any drop in revenue.
Nadol also noted that the government recently certified Comtech's newer satellite earth stations which could boost orders but said that additional defense cuts seem all but certain at this point.
SHARE ACTION: Shares of Comtech rose 95 cents, or 4 percent, to $25.08 in late trading. The stock fell 6.5 percent on Friday in reaction to its fiscal first-quarter earnings report.
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