Citi Warns On Comtech: 'Significant Hurdles Remain'

While the recent acquisition of TeleCommunication Systems is a positive for Comtech Telecomm. Corp. 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.

Facing Hurdles

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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