A Well-Connected Small Fry

07/09/2009 2:18 pm EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of the SmallCapInvestor PRO, recommends a compellingly valued tech supplier fattening up on government contracts. 

Investing during [the first six months of this year] was all about recovery. The economy was stabilizing and stock prices were rebounding from extreme oversold conditions. Hope was in the air, "green shoots" were coming, and stocks took off on an unprecedented rally.

But … it's not spring anymore. Green shoots now need to be saplings or young plants—however you want to complete the metaphor. The point is that the third quarter is now underway. This is the quarter where growth is supposed to return to the US economy. Indeed some might say it's expected. This is the quarter where valuation metrics like price-to-earnings and cash flow become meaningful again.
  
So the question is—have business conditions improved to the point where revenues and earnings can not only support current stock prices, but give us a glimpse of future quarters with higher revenues and earnings, and higher stock prices?  

That Doesn't Sound Like a Sure Thing:
Analysts have lowered the earnings bar pretty far. Companies should have no problem meeting expectations. Most will even beat expectations. But what will they say about the next quarter? Or the one after that? There's plenty of reason to wonder just how much upside there is for stocks in general. And that affects how we go about finding our next investment.

For the sector, we like technology. Valuations are reasonable, and with corporations starting to spend again, there could be upside for the sector. For the stock, we've chosen TeleCommunication Systems (Nasdaq:TSYS). Since it does a lot of government contract work and also provides wireless 9-1-1 service, its revenues are expected to remain stable. And if technology rallies, the stock will benefit.
   
Annapolis,MD-based TeleCommunication Systems (Nasdaq:TSYS) is a leading provider of mission-critical wireless data solutions to government customers, public safety and carriers. TeleCommunciaton Systems produces wireless data communications technology solutions that require proven high levels of reliability. Its wireless data offerings include secure deployable communication systems and engineered satellite-based services; location-based wireless and VoIP Enhanced 9-1-1 services; messaging and location service infrastructure for wireless operators; and commercial location applications, like traffic and navigation, using the precise location of a wireless device. 

TSYS services facilitate the transmission of voice, video and data. Its integration with public switched networks, global information networks, intelligent data servers, global computer network gateways, and intelligent peripherals enables wireless transmissions and information processing for sending and receiving.

Why we like TSYS:

  • Growth in government segment.
  • The technology sector is strengthening and telecommunication services stocks will benefit.
  • Reliable earnings growth and healthy balance sheet.

[In the most recent quarter] revenue was $70.5 million, an increase of 75% from $40.4 million in the first quarter of 2008. EBITDA for the quarter was $11 million, an increase of 31% from $8.4 million in the same quarter last year. Net income was $4.9 million or $0.10 per diluted share, an increase of 7% from $4.6 million or $0.11 per diluted last year.

The government segment continues to fuel this company's growth. Revenue from government customers for the quarter was $44.9 million, up more than three-fold from $14.2 million last year. Gross profit from government customers was $9.7 million in the first quarter of 2009, up $6.4 million from $3.3 million in the same year-ago quarter.

This company continually crushes analyst estimates and is doing this in a bear market. This is a sign that business is starting to turn around and the stock price will follow fundamental growth. Shares are valued at 9 times current earnings and 7 times forward earnings. These multiples are low for a company growing as fast as TSYS. We are looking for shares to trade at a minimum of 12 times current year and 10 times forward-year earnings. This results in a $10 minimum price target.

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