Comtech Telecommunications: Update on MTS Contract

On June 10, I recommended purchasing shares of Comtech Telecommunications (NASDAQ: CMTL) partially due to the anticipated announcement of a huge contract extension with the Army for its Movement Tracking System. In May, the Army published a pre-notification to extend Comtech’s existing contract an additional 3 years for $646M. The anticipated date of execution was June 15.

Anxious Comtech shareholders watched that date come and go with nothing more than a stream of small contract announcements. With no word from the company, we were left to speculate as to whether this was just a typical government delay or something more dire.

Finally, word came last night that Comtech has secured a short-term extension to August 31 for $45M, and would be using this period to negotiate and finalize the 3 year extension.

We can only speculate as to the eventual outcome of those negotiations, but the short-term extension has reinforced the importance of Comtech to the MTS. In addition, the government looks prepared to beef up its spending on the MTS - the $45M addition brings the amount left on the current contract to $65M, representing an annual run rate of ~$400M.

As expected, the market has responded positively, with shares up over 2% as of this writing. I anticipate even more upside, as shares should get another big pop whenever the final contract extension is announced. I don’t buy the assertion that the full upside of the contract is already baked into the stock price. While I usually agree with the efficient market theory, there are sometimes it just doesn’t seem to hold. Take the extreme example of the iPhone. After Apple had announced the imminent release of the iPhone, its stock soared on any subsequent, although expected, announcement such as the release date.

I don’t mean to assert the Comtech has anything close to the hype of Apple - nothing does. But when Wall Street analysts wake up to see their Bloomberg terminals showing news of a little-followed $1.1B company landing a $600M+ contract, even if it was expected, the money will flow in.

Even though the shares of Comtech have been on a nice run, I am holding my shares in the expectation of further upside.

Disclosure: SmartGuyAB is long CMTL

Radvision: A play on the growing demand for video

• Buy RVSN around 20.04

Radvision (NASDAQ: RVSN) is an Israeli company that provides video conferencing over IP, 3G, and future networks such as 4G and WiFi. Radvision’s software responsible for controlling and managing real-time voice, video and data traffic among 3 or more people. This means you can be on your cellphone in an airport in China and fully participate in a meeting held in the Chicago office.

Video/web conferencing and telecommuting are two of the biggest growth trends in American business right now. International companies are increasingly realizing the benefits of conducting meetings and trainings virtually, rather than deal with the cost, complexity, and lost time of travel.

Radvision’s financials demonstrate the enormous growth of this market. Revenues have doubled since 2003, from $51M to an estimated $105M this year. Earnings have grown even faster, more than quintupling over the same period. The company has a strong balance sheet, with a market cap of $450M and over $130M in cash. Considering its growth, the Radvision has a reasonable PE of 29 - lower than 42 for competitor Polycom and the 52 of WebEx when it was purchased by Cisco. Radvision believes its stock is a bargain - it has been consistently buying back shares.

Speaking of Cisco, they are Radvision’s largest customer, and have been increasing orders since 2000. There has been speculation that Cisco’s recent acquisition of WebEx will hurt Radvision, likely the reason for Radvision’s languishing stock price. In fact, I believe the opposite is true. Cisco CEO John Chambers has repeatedly stressed that his company’s future is largely tied to video. WebEx’s strength lies in its web-based collaboration software and desktop presence, while Radvision specializes in the “behind-the-scenes” video architecture. To support this point, Cisco has placed orders for new Radvision products for delivery in the second half of ‘07.

Although Cisco is a major part of Radvision’s plans, the company also has strong relationships with IBM and Microsoft, among others. They are expanding relationships with 3G providers such as Nokia and Siemens. With the demand for video conferencing only increasing, I believe that this is a good time to buy Radvision.

Disclosure: SmartGuyAB is long RVSN

Nintendo: A homerun in the fast growing video game industry

• Buy NTDOY.PK around 42.60

Nintendo (OTC: NTDOY.PK) manufactures hardware and software in the fast growing video game industry. Thus, the company makes the razors and the blades. More importantly, Nintendo is the only video game console maker with a profitable operation. On the game side, the company created such industry icons as Mario and Donkey Kong and launched franchises like The Legend of Zelda and Pokémon.

The video game industry has been growing gangbusters for the past decade. In fact, video game sales now rival sales of other major media including music, books, and movies. For those with a futurist bend, video games are sensory-rich experiential mediums evolving toward the inevitable virtual reality.

In addition to the exciting macro trend, Nintendo has recently taken center stage as a gorilla in the new console cycle. The Wii console offers revolutionary game play through controllers with sensitivity to full-scale motion. In English, this means Wii gamers swing the controller like a bat while playing baseball, or shadow box while boxing. This exciting development makes me believe the Wii is the new media killer app and will dethrone the iPod as the must have product of the times.

During the month of May, Nintendo continued it’s stronghold on the market holding down the two top spots for hardware sales with the Wii and handheld Nintendo DS, and lassoing four of the five top-selling game titles for the month. Also note that in Japan (a critical market for success) the Wii has outsold the PS3 fivefold and Microsoft’s Xbox 360 at a 2-1. One word comes to mind: domination.

The macro and micro story is firing on all cylinders, and a check under the hood reveals that Nintendo has the financials to support a solid long-term investment. The company had record operating profits of $1.91billion (FY ‘07), more than double FY ‘06. In addition, net income is up 77%.

I recommend nibbling on the stock whenever it pulls back. Keep your eye on Japanese interest rates because their rise will affect NTDOY, but not Nintendo’s super surging global growth.

Disclosure: SmartGuyDH is long NTDOY.PK