Merriman Curhan Ford Initiates Coverage on the Defense Electronics/Advanced Communications Sector

Jan 11, 2010, 13:10 ET from Merriman Curhan Ford

SAN FRANCISCO, Jan. 11 /PRNewswire-FirstCall/ -- Merriman Curhan Ford (Nasdaq: MERR) today announced that it has initiated coverage on the Defense Electronics/Advanced Communications sector under equity research analyst James McIlree, CFA.


McIlree's research thesis includes company coverage of Comtech Telecomm (Nasdaq: CMTL), Force Protection (Nasdaq: FRPT), GeoEye (Nasdaq: GEOY) and Harris Corp. (NYSE: HRS) with Buy ratings, and Applied Signal (Nasdaq: APSG), DigitalGlobe (NYSE: DGI), Globecomm (Nasdaq: GCOM) and Ultralife (Nasdaq: ULBI) with Neutral ratings.

McIlree highlighted these themes in his company initiation reports:

  • Comtech Telecomm (Nasdaq: CMTL) ($37.00) (Buy)
    • We are initiating coverage of Comtech Telecomm with a Buy rating and believe a potential valuation range of $45-50 per share based on an EV/EBITDA multiple of 5.5-6.5x is achievable. As the year progresses we expect clarity on the BFT (Blue Force Tracking) and MTS (Movement Tracking System) contracts to move the multiple. We also believe a strengthening economy will lead to better than expected satcom modem results, and excellent cost controls to propel estimates higher.
  • Force Protection (Nasdaq: FRPT) ($5.35) (Buy)
    • We are initiating coverage of Force Protection with a Buy rating and believe a potential valuation range of $7 - 8 per share based on an EV/EBITDA multiple 6.5-7.7x is achievable. We believe our estimates can be exceeded since we assume a drop in maintenance revenue per vehicle in 2010, but given the high operational tempo in Afghanistan, this could prove conservative. In addition, we have not built in potential international vehicle production wins, which could also drive estimates higher.
  • GeoEye (Nasdaq: GEOY) ($28.49) (Buy)
    • We are initiating coverage of GeoEye with a Buy rating and believe the shares have the potential to reach $35-40 per share. This is based on achieving an EV/EBITDA multiple of approximately 5-5.5x. While there is not as much upside to estimates relative to DigitalGlobe, there is upside. Even at 5x FTM EBITDA, we regard the shares as cheap given the limited competition, strong customer demand and favorable financial characteristics.
  • Harris Corp. (NYSE: HRS) ($48.69) (Buy)
    • We are initiating coverage of Harris Corp. with a Buy recommendation and believe a potential valuation of $60-65 per share is reasonable. This is based on the shares trading between a market multiple and a 10% premium. In the short-term we believe the driver for possible upside to estimates is the increased troop deployment to Afghanistan. In the long-term, we believe the exigent procurement of radios today could lead to a greater role in the Joint Tactical Radio System (JTRS) and greater long-term revenue and EPS visibility.
  • Applied Signal (Nasdaq: APSG) ($19.14) (Neutral)
    • At less than 7x FTM EBITDA, valuation for APSG is attractive, but a catalyst is lacking. The company's move into tactical SIGINT (products used to detect and locate 3G wireless signals) is taking longer than expected to develop and will be a drag on growth this fiscal year. The company's core broadband communications business is strong, but growing modestly. And while sensor systems are growing quickly, the base is small. Patient investors should take a look, since the company is in the right place at the right time and a potential takeover target.
  • DigitalGlobe (NYSE: DGI) ($25.92) (Neutral)
    • We believe revenue and EBITDA estimates for DigitalGlobe's FY10 remain too high. That and the valuation premium to GeoEye keep us on the sidelines. We estimate the company's recently launched WorldView-2 satellite, which achieved full operational capability this year, will become fully utilized in the 2011 time frame, driving a significant increase in financial results. For us, the take up of WorldView-2's capacity is a matter of when, not if.
  • Globecomm (Nasdaq: GCOM) ($7.86) (Neutral)
    • Globecomm has made an impressive transformation from a commodity supplier of satellite ground station equipment to a leading independent teleport operator and designer and manufacturer of military and commercial satellite ground station equipment. The shares are trading at 5.4x FTM EBITDA and, in our opinion, could probably trade up from here. However, given the lack of liquidity in the name we are looking for a bigger potential upside before recommending the shares.
  • Ultralife (Nasdaq: ULBI) ($4.47) (Neutral)
    • The short-term task for Ultralife is to convert the Satellite-on-the-move (SOTM) kits in inventory to cash and pay down short-term debt. This is an urgent and achievable task. Over the long-term, we believe the company needs to generate more consistent results in order to win back investor favor and improve its multiple.

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