Transformation Will Reinforce Operations And Open Cloud And Satellite Markets

Key Takeaways

• Comtech's transformation plan aims to enhance profitability through operational improvements, cost management, and high-margin initiatives.
  
• Strategic alliances and divestitures could enhance earnings and financial flexibility amidst growth in satellite and wireless segments.
  
• Comtech's financial struggles, covenant breaches, and operational challenges raise concerns about stability and future growth, despite ongoing transformation efforts.

Catalysts

Engages in the provision of next-gen telecommunication solutions in the United States and internationally.

• Comtech is implementing a comprehensive transformation plan, focusing on improving operational discipline, cost structure, and high-margin business initiatives, which is expected to enhance future profitability and potentially expand net margins.
  
• The company has secured a $26 million contract with L3Harris for advanced next-generation modems, indicating potential growth in the Satellite and Space segment that could positively impact revenue.
  
• Strategic alternatives are being explored for business units, which may lead to opportunities for divestitures or strategic alliances, potentially boosting overall earnings and financial flexibility.
  
• The strengthening of financial stability through a $40 million capital infusion and amended credit agreements is expected to reduce interest costs, leading to improved net earnings and cash flow.
  
• Introduction of new cloud-based products in Terrestrial and Wireless segments and international expansion of 5G location technologies are expected to drive revenue growth in these high-demand areas.

Comtech Telecommunications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Comtech Telecommunications's revenue will grow by 2.2% annually over the next 3 years.
• Analysts are not forecasting that Comtech Telecommunications will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Comtech Telecommunications's profit margin will increase from -56.4% to the average US Communications industry of 12.3% in 3 years.
• If Comtech Telecommunications's profit margin were to converge on the industry average, you could expect earnings to reach $65.1 million (and earnings per share of $2.03) by about April 2028, up from $-279.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.4x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the US Communications industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 3.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Comtech Telecommunications Future Earnings Per Share Growth

Risks

• Comtech has historically faced financial performance issues and missed expectations, which could impact investor confidence and future earnings.
  
• The company anticipates breaching financial covenants, having already defaulted on loans due to covenant breaches, highlighting risks to financial stability and earnings.
  
• Despite a transformation plan, there are significant challenges with operational improvements and cost optimization, which may impact net margins if not effectively managed.
  
• The strategic review of company units could indicate uncertainty or the potential for divestitures, impacting long-term revenue prospects if key segments are sold or restructured.
  
• The Satellite and Space business has underperformed and requires a turnaround, posing risks to revenue growth if the restructuring efforts do not yield desired results.

Valuation

• The analysts have a consensus price target of $5.0 for Comtech Telecommunications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $530.2 million, earnings will come to $65.1 million, and it would be trading on a PE ratio of 3.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $1.29, the analyst price target of $5.0 is 74.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.