We like RADN a lot Bill, and add it to our hedge fund portfolio. Analysis attached:
* RADYNE COMSTREAM (RADN) & (RADNW) - RADN designs and manufactures equipment used in the ground-based portion of satellite communication systems to receive and transmit data, video, audio and Internet information over satellite communication systems. RADN also designs and manufacture equipment used in cable television systems. The company has customers in over 80 countries that operate in the television broadcast, telecommunications, and Internet service provider sectors.
The satellite ground segment consists principally of one or more earth stations. An earth station is an integrated system consisting of antennae, radio signal transmitting and receiving equipment, a satellite modem, a frequency controller, and voice, data, and video network interface equipment. Earth stations provide a communications link to the end user either directly or through land-based networks.
- Growth in Satellite Data Transmission
Satellite technology is establishing itself as a key element in communications systems, and can provide high-speed communications service where there is no suitable alternatives are available. And in certain situations satellite data transmission has a major cost advantage over traditional land-based networks. One advantage is that unlike the cost of land-based networks, such as microwave and fiber cable, the cost to provide services via satellite does not increase with the distance between sending and receiving stations.
RADN provides products for satellites in Geostationary Earth Orbit (GEO), positioned 21,000 miles from earth in the "Clark belt" where they maintain a constant position relative to the earth which assists in maintaining data transfer. The company does not provide products for low-orbit or mid-orbit satellites, mainly because its' technical expertise, patents, and customers are in the GEO market segment.
The Satellite Industry Association estimates the global market for satellite ground equipment and integration services was $15.2 billion in 1998, of which RADN management estimates $800 million was for the type of equipment that they develop, manufacture, and market.
RADN management believes that growth in demand for satellite system ground-based equipment will be driven by: (1) the growth of demand for satellite-delivered communications services; (2) the deregulation initiatives taken in the telecom markets by many governments; (3) the relative cost-effectiveness of satellite communications for many data applications, including high-speed bandwidth for Internet connects; and (4) technical advancements that will broaden applications and increase the economic attractiveness of satellite communications.
Satellite technology is becoming crucial in the expansion of the Internet to international and remote sites. Over 80% of Internet content still resides in North America, but as the Internet spreads to international markets satellite networks can economically provide the connection where local infrastructure has not been developed or built-out to any great degree.
A recent survey by the Satellite Industry Association and Futron Corporation found that total revenues for providers of satellite communications services grew at an 18% compound growth rate to $26.2 billion in 1998, from $21.2 billion in 1997 and $15.9 billion in 1996.
- Cost-effectiveness of Satellite Communications Systems
The relative cost-effectiveness of satellite communications services is a major factor driving the growth of satellite communications services in areas with rapidly growing telecommunications infrastructures. Large geographic areas, where population concentrations are separated by significant distances, require a technology whose cost and speed of implementation is relatively insensitive to distance.
Unlike the cost of land-based networks, the cost to provide services via satellite does not increase with the distance between sending and receiving stations. Satellite networks can be rapidly installed, upgraded, and reconfigured as compared with land-based networks, which require rights-of-way and are expensive and time consuming to install and upgrade.
- Financials Very Attractive, Fastest Growing High Tech Company In Arizona
Revenues for the last four quarters compared to the previous four quarters increased by 36.4%, and the company sells at a trailing price/earnings ratio of 9 and a forward price/earnings estimate of 6 based on consensus earnings estimates. The company sells at a discounted price/book value of 1.5, and at a discounted price/sales ratio of 0.8. Return on equity is an impressive 57.6%.
The company has no debt, and is a microcap with a total capitalization of $58 million. The company is closely held, and has a float of only around $14 million.
Three analysts cover the company, and all three have updated their reports within the last two months. All three analysts rate the company a buy or strong buy, and forecast a long term earnings growth rate above 25% per year. Based on revenue growth, RADN was recognized last month as the fastest growing high tech company in Arizona for 2000 by the Arizona Business Journal sponsored "FastTech 50".
- RADN Warrants Available
One of the more interesting aspects of this recommendation is that aggressive investors can purchase RADN warrants that are traded under the symbol RADNW. These warrants, issued by the company in February of this year, give the holder the right to purchase one share of stock for $8.75 until February, 2005.
A warrant is much like a long term option, and can be purchased using an online brokerage account or from your regular broker. Unlike the common stock, should RADN be trading at less than $8.75 on February, 2005, the warrant will expire having no value. On the other hand, should the stock perform well, the warrant will in theory increase in value to a much greater degree than the stock.
Warrants in a sense give the holder a leveraged position in the company, with a much greater potential for both upside and downside moves. The 4+ year term remaining on the warrant has value to investors - a time value. Investors who do not want to accept the risk and volatility of the warrants should consider purchasing the common stock (although note that as a micro-cap it will also be very volatile).
- Risks
Spending in the telecommunications sector is forecast by some analysts to slow as some telecommunications providers have problems raising capital for system buildouts. Others, due to margin pressures, will also slow their upgrades and buildouts. This may be true short term, but we feel that RADN offers a product that increases the cost effectiveness of providing bandwidth in certain situations. And with the amount of data moving over the world's telecommunications systems doubling every 9 months or so, longer term the outlook for system upgrades and expansion is very positive.
Of more concern is the fact that the stock is closely held, with a float of only $14 million. This reduces the amount of institutional interest in this company, and reduces liquidity for such investors. The small float also adds to the volatility in the price, as can be seen from the 52-week high of $38.12 and low of $3.60 for the common. Recent downside pressure may be from tax selling, as well as due to telecom spending issues noted above. But such volatility creates opportunities for long term investors.
- Investment Conclusion: Strong Buy
Based on what we perceive as the undervaluation of RADN, the positive industry trends, the fact that satellite communications can be more cost effective in certain cases than traditional land- based systems, the management record building revenues and earnings, we think that the risk/reward relationship is very positive here for long term investors. Because of the positive long term outlook we are aggressively buying the warrants, as well as the common stock, with a 12- month target price of $16 for the stock (RADN). |
