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By Ian Wyatt, Big Idea Investor |
COGO | Sep 05, 2006 |
By Ian Wyatt, Editor-in-Chief, Growth Report
One of our favorite companies in the Growth Report portfolio is Chinese technology firm Comtech (Nasdaq: COGO).
At Growth Report we aim to buy shares of small, high growth companies at attractive valuations. Comtech meets our rigorous investment criteria and we see a bight future ahead for this company in 2007 and beyond.
Comtech provides over 500 electronic module designs for mobile telephones and other electronic devices. The company does all of its business in China, working with over 30 suppliers to customize technology components to meet the specialized requirements of its 200 plus customers.
One of the biggest opportunities ahead for the company is the upcoming move to 3G mobile technology. The pending migration to the better 3G mobile network creates a significant opportunity for Comtech to participate in upcoming phone and infrastructure upgrades throughout China. Comtech has already closed a deal with Huawei, the exclusive supplier of 3G phones to Vodaphone, and numerous similar opportunities remain.
Simply put, Comtech purchases components from suppliers, and then tailors those components to meet the specific needs of its customers.
Financial results clearly demonstrate the company?s impressive growth. In 2005, revenues increased 41% to $107 million, while net income increased 43% to $10.7 million or $0.36 per share.
Growth continues at a rapid pace in 2006, with the most recent second quarter results including revenues of $41.6 million, an increase of 66%. Net income for the quarter was $3.6 million, or $0.11 per share, a 41% increase. Gross margins similarly increased from 17.6% to 18.5%, as the company recently expanded its product and service offerings to capture higher margin segments including engineering services and digital home entertainment. Comtech?s balance sheet is clean, with $20.3 million in cash and $3.6 million in debt.
Looking to the future, management expects 2006 revenues of $155 million, an increase of 45% from 2005. Earnings guidance calls for EPS of $0.52. Consensus estimates from eight analysts call for EPS of $0.52 on revenues of $156.7 million. For 2007, analysts see continued growth and revenues of $185 million with EPS of $0.68.
Shares of Comtech currently trade around $11, or a reasonable 21x 2006 EPS estimates and 16x 2007 EPS estimates. We think shares of Comtech will trade at $16 within the next year, representing a PE multiple of 23x 2007 EPS estimates, which we believe could prove conservative.
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