Citi Warns On Comtech: 'Significant Hurdles Remain'
While the recent acquisition of TeleCommunication Systems is a positive for Comtech Telecomm. Corp. (NASDAQ: CMTL), the latter is facing several headwinds, Citi’s Stanley Kovler said in a report. He initiated coverage of Comtech with a Neutral rating and a price target of $13.
The TCS acquisition improves the NewCo’s mix of government and commercial revenue to 60:40 in FY17 from a mix of about 50:50 previously. The transaction also stabilizes the FCF generation at ~$26 million, which is sufficient to sustain the FY17 dividend of $24 million, analyst Kovler mentioned.
Moreover, TCS reduces Comtech’s dependence on volatile or oil-dependent verticals as well as defense budgets that have plateaued.
Kovler believes that Comtech is facing significant hurdles, including:
- A constrained Army budget after troops have been pulled back from the Middle East
- Contracts ending
- Exposure to volatile oil dependent end markets
- Currency risk
- Political instability at certain foreign customers
“Comtech remains heavily reliant on government spending, and has a history of uneven guidance as it looks to drive growth from quasi-related niche markets,” the analyst commented.
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|Aug 2016||Citigroup||Initiates Coverage on||Neutral|
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