Value Find: Endwave Corp.
Stuffed with cash and operating around break-even levels, with a recent indication of improving operating momentum, this microcap tech play is worth a closer look for value-hungry investors.
Long-time underperformer Endwave Corp. (Nasdaq: ENWV), a manufacturer of RF modules for the telecommunications, defense electronics and homeland security systems markets, recently reported two positive developments. On Jan. 7, Endwave announced preliminary fourth-quarter revenue of $14.4 million, well above its previous guidance of $11 to $13 million. The company also said that it expected to report “meaningful revenue growth” in 2008. Endwave is set to report its fourth-quarter and full-year results on Feb. 5. As of this writing, Endwave shares are changing hands for $6.73, near the low end of the stock’s 52-week range of $5.40 to $13.75.
In late December, San Jose, Calif.-based Endwave announced that it had completed the repurchase of 2.5 million shares of its stock at $6.83 a share from the Wood River Funds. The remaining 1.6 million Endwave shares held by Wood River were purchased by institutional investors. Back in 2005 it came to light that Wood River had secretly invested 85% of its entire portfolio in Endwave stock without reporting this position to the U.S. Securities and Exchange Commission. Ultimately, Wood River was shut down and its founder was sentenced to prison last fall. Endwave was only a victim in this scheme, but the uncertainty of what would happen to Wood River’s substantial 30%-plus stake in Endwave had weighed on the stock. With these repurchases, the Wood River saga is over and liquidity in Endwave shares should improve.
Even after the recent stock repurchase, Endwave is still sitting on a mountain of cash that it can use for future buybacks or acquisitions. Endwave ended the year with $49 million in cash on hand and no debt. Based on approximately 9.1 million shares outstanding after the buyback, as well as preferred stock that can be converted into another three million shares, the $78 million market capitalization company sports an enterprise value of just $32 million. This values the stock at just 0.5x its expected 2007 full year revenue of approximately $56.5 million. Of course, all is not sweetness and light for Endwave, as indicated by the stock’s lowly valuation and lack of Wall Street analyst coverage. For the third quarter ended Sept. 30, Endwave reported revenue of $13.8 million, up from $13.5 million in the second quarter, but down substantially from $18.8 million a year ago. The non-GAAP loss for the quarter of $0.21 million, or $0.02 a share, compares with a non-GAAP profit of $2 million, or $0.14 a share, in the year ago period.
Endwave’s revenue has been hurt in recent quarters by the merger in April 2007 of the telecommunications network businesses of its two largest customers, Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI). During the first nine months of 2007, Nokia Siemens Networks accounted for 38% of Endwave’s total revenue. Endwave has responded to this merger by trying to further diversify into the defense electronics and homeland security markets. In April of last year, Endwave acquired ALC Microwave, a small manufacturer of logarithmic amplifier subsystems for the defense market. Endwave’s defense and homeland security-related revenue rose 35% in the third quarter from a year ago, but the telecommunications segment still accounted for 77% of total revenue. While Endwave claims it is on good terms with Nokia Siemens Networks, this significant revenue concentration remains a very real risk for the stock.
While Endwave’s expected 2007 revenue of approximately $56.5 million is down from 2006 revenue of $62.2 million, the company has managed to put together solid top-line growth in recent years. Endwave reported 2005 and 2004 revenue of $48.7 million and $33.2 million, respectively. Endwave has flirted with reporting cash flow breakeven levels as far back as 2003, but, so far at least, has been unable to turn the corner to sustained profitability. Thus, investors are understandably still skeptical to the story. While some of this skepticism is warranted, down at these price levels, the stock is on sale for not much more then the cash on its balance sheet. Assuming the revenue contribution from Nokia Siemens Networks has indeed normalized as Endwave claims and non-telecom revenue continues to rise, a good year could actually be on tap.
Endwave CEO Edward Keible must think his company has a fighting chance since he purchased over $100,000 worth of Endwave stock at the $6.56 to $7.40 level in November. Two institutional investors, EagleRock Capital and Potomac Capital, collectively hold a greater than 25% stake in the company. Again, the recent resolution to the bizarre Wood River situation should help boost the liquidity in the stock. Endwave trades on average approximately 43,000 shares a day.
Endwave (ENWV) certainly isn’t a microcap play for the faint of heart, but it represents an interesting mix of speculation and value. Overall, I would term the stock a “value find” play for medium-to-higher risk-oriented investors. I would consider adding the stock around the $6 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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