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.

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