Radyne-o-mite (RADN)

Radyne (RADN)


Bought January 7, 2005 at $7.86


Radyne investment thesis in one sentence?

Radyne makes and sells the world's best satellite communications equipment and stands poised to benefit from increased data transmission worldwide and the rollout of HDTV in the US.

Radyne Corporation, formerly Radyne Comstream, used to be such a quiet little section of my portfolio. I bought it what seems like ages ago and nearly forgot all about it. They make communications equipment, primarily satellite modems and ground stations and the associated encoders, etc. used in satellite communications -- and they have some of the best products and best international distribution in the world, as far as I can tell.

This is one of the smaller companies in my portfolio, at under 200 Million in market cap even with the run up following earnings, but it trades at a pretty low PE ratio thanks to a very checkered past. This was a recommendation from Motley Fool's Hidden Gems ages ago, I'm not sure when they first recommended it ... but I'm glad they did as it brought lovely Radyne to my attention.

They announced a big orderrecently but that wasn't what sent the stock climbing nicely during the last week or so, then blitzing up the charts in after hours trading on Wednesday evening. What did that was earnings, and especially earnings growth. The after hours trading moderated a bit when we opened on Thursday morning, but still up significantly in the $11 range.

A few months ago Radyne decided to buy Xicom, a similar provider of satellite telecom gear that filled some holes in their product line and allowed them to really sell a full line of products -- it's always nice if you can satisfy all of your customers' needs. Radyne had been a profitable, specialty niche company unti this point, and in retrospect it looks as though the acquisition came along at a perfect time -- strengthening the product lineup just as business is getting ready to (possibly) dramatically pick up.

What does Xicom do? As I said, they provide a more diverse product line -- they are the world leaders in satellite amplifiers, which is a perfect fit with Radyne's products -- and an established customer base. They bring a different customer mix to the table as well, with much more government business and a larger proportion of domestic business to offset Radyne's international strength.

You see, satellite communications is just a very, very good idea -- it's the least expensive way to blanket the globe, and it can be used for all kinds of digital communications, whether it's telephone, data, tv service a la DirecTV, military command and control, or, in perhaps the most important case for Radyne, television feeds.

That's television feeds like the stuff they've been sending via satellite for ages now -- the latest NBA game broadcast live from the arena, news reports from a lone reporter on the campaign trail with a van, camera and Radyne satellite connectoins (in Idaho or India), etc ... and they also sell HD and standard digital television encoders that are integrated with the satellite base stations and receivers.

And that's a big part of the short term Radyne growth story -- digital and High Definition TV. I know, this is a growth story you've heard before, the promise that HDTV is "Just around the corner" has been with us for at least a decade ... but this time it's a little different. Your neighbor probably has one if you don't. They're selling them at Best Buy -- and they're the huge, sexy flat screen TVs that everyone drools over. That's the market that Radyne's advanced satellite equipment can help serve. And they noted during the earnings call that they'll soon have another big order in hand, this time for just that market.

Earnings are well diversified around the world and in various industries -- for the core satellite communiations division the split is close to 50/50 between domestic and international business, though so far the vast majority of their domestic business is government and military related. There's certainly room to grow almost everywhere with the demand for data transmission -- not just audio, video and telephone connections are needed around the world, but internet growth is, of course, still dramatic -- and Radyne makes modems that make internet data transmission via satellite possible, too.

The split for HDTV and related products and services is much more US-centric right now -- more than 80% of that business is domestic, but although it's growing quickly domestically (and we might expect some spikes in the growth this fall as we prepare for the congressional mandate for digital HD transmission by January), Radyne expects that international markets will make up the majority of their revenue in this segment, too, in a few years. I read that as good diversification of markets, and great growth, as well as a great way to leverage their strong international distribution network.

So, should I continue to hold this paper profit?

I always question myself when a stock I like long term but didn't expect to wildly outperform the market has a huge tick up -- should I sell? And almost always, the answer is no. It's true that no one ever went broke taking a profit, but I've got my 401K sitting in the corner virtually untouchable, marching along and matching the market step for step -- with my individual stock selections, I'm not worried about going broke, I'm worried about catching the rocket ships. And just because I wasn't thinking Radyne would rocket like this in the short term doesn't mean I'm not ready to go along for the ride. And I don't much like the tax and transaction cost implications of trading in and out, even if you're pretty sure you can time the moves perfectly.

Radyne has had three years of pretty flat revenues, but steadily growing earnings following their return to profitability three years ago. The house seems well in order, and we're now at an inflection point where it seems they are ready to grow significantly to meet the demand for their products. Sales were 71% higher this quarter than last year. Order backlog is at $30 million now, more than their total sales were for the first half of 2004.

Now the bad news:

I loved this company when I bought it because it seemed to be poised to benefit from the long term trend toward increased and more sophisticated satellite communications in general, and broad rollout of HDTV specifically, AND because they had tons of cash in the bank, were growing earnings, and were debt free.

But they're not debt free anymore, and they've little cash left. Not that they're in trouble by any means, but they spent all their available cash and went into a little debt to buy Xicom ... I think that's going to turn out to be a great decision, but it does make them a little bit riskier as they don't have that $40+ million cash hoard to fall back on anymore.

But I'm not selling. I'm going to try to pretend that Radyne is still the sleepy little company I bought in January and ignore it for the most part -- a strong position in a growing industry is not somethign to walk away from, especially if you can get it at a discount both to the overall market and to the company's growth rate.

Investor presentation available on their website, as is the Xicom explanation -- definitely worth a read.

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Netease-y Street (NTES)

Netease (NTES)


Bought May 6, 2005 at $50.45

I've got to be honest with you -- I thought this was the safer, less volatile long term growth play on Chinese internet use and gaming, and Shanda, which I have a larger position in, was the one that might rocket to the sky without warning.

Nice to be wrong, sometimes ... and you never know what will happen when SNDA reports earnings next week.

So in one sentence, what do I like about Netease?

Netease is reaching a new audience for online gaming in China, and even after it's recent run up it trades at a tremendous discount to its meteoric growth rate.

Warning: three paragraph rant coming: Larry Kudlow was on the XM CNBC channel as I drove home last night, and when he mentioned Chinese internet stocks (in regard particularly to Netease, which obviously got everyone's attention with it's 25% jump up after earnings), he sounded as if he'd rather invest in rat feces than chinese internet stocks. This is not the first time I've thought he was wrong, but I can't seem to stop listening to him lecture to his sychophantic guests (does he ever even ask questions without answering them first?)

How can you avoid a whole class of companies that is undervalued relative to their growth, feeds the second largest and fastest growing marketplace in the world, and has developed a leadership structure with a few strong brands and companies at the top -- not only Shanda and Netease, but Sina, which is having its troubles lately thanks to mobile services, and Baidu and Sohu and maybe a few others?

His complaints were the lack of transparency in Chinese stocks, and the fact that they are subject to the whims of the Chinese government's regulations. On the first, sure, they are less transparent than US companies -- but there are a lot of US companies whose structures and filings I don't understand, too. The Chinese companies that trade as ADRs report to the SEC, and I don't see why they have much more reason to be fraudulent than US companies. I'm not going to buy a Chinese penny stock, I've seen to many of those that are clearly just shell companies with too many layers of confusing ownership, and I'm not crazy about some Chinese companies -- I owned China Yuchai until I realized that I couldn't figure out who really owned and controlled it, and that there was much more competition in their space (diesel engines) than I originally thought. And I'm a little nervous about owning government-controlled entities because I'm not sure their priorities will be in line with mine, but that's not a hard and fast rule -- I did own PetroChina for a while (after all, so does Warren Buffett), and in other countries I have much less compunction about that. I have profitably owned both PetroBras and Statoil (Brazilian and Norwegian, respectively), and probably sold both too soon.

But enough about that -- why did I buy Netease, and why do I like it? I am still holding, even after our ridiculous leap up the leaderboard this week.

Some of the argument in favor of investing in Chinese gaming stocks in general I already made in my writeup on Shanda -- no need to repeat it here, read it if you want to.

But Netease at first seemed to me to be a bit more stable a creature, at least in design, than Shanda. They've actually had a rockier past than Shanda, but have a broader portal business already, whereas Shanda is just trying to build one. In Wall Street Speak, Shanda has been a "pure play" on Chinese online gaming, whereas Netease's foray into gaming began as only one of the parts of their online businesses. That's changing with this earnings report, as wireless services now make up just a small and shrinking part of their business and advertising, which is also growing very fast, is not keeping up with the explosive growth of gaming revenue for Netease.

So now that we should really think of Netease as "just" a gaming company, why hold?

A big part of why I'm still holding and not taking profits is that their new game, Fantasy Westward Journey, is already a huge hit. We already know that it has been very successful particularly among women, who are not targeted by many of the popular games. I'm just guessing, along with everyone else, that Shanda's next generations of games will find an eager audience as their existing ones have, but I could be wrong. And both SNDA and NTES have several 3d or 2.5D games in development or early beta -- this is a big deal, as World of Warcraft's worldwide success should show us.

China Stock Blog has some good stuff on Netease, as usual -- notes from conference call and from bullish and bearish few analyst reports. Netease's interpretation of regulatory change seems to be a bit different than that of the news agency Interfax, which is reporting that significant adjustments are already underway to gaming rules. No one else is really sure what the Chinese will do -- on one hand they're investing huge amounts of money into building the gaming industry and building something akin to business incubators for gaming companies in several cities, and on the other hand they talk about the need to regulate video game "addiction" and antisocial behavior.

So will China kill the goose that lays the golden egg? Will, frankly, the Chinese government do something that kicks their young men out of internet cafes and tries to get them working more hours, when the Chinese economy cannot create enough employment for it's people as it is? I don't think so. Like the long debate over the tiny blip in currency revaluation, this is a lot of sound and fury, signifying, I hope, not much. I don't have any contacts in the Chinese ruling committee, however, so take my conjecture with a big, kosher-size grain of salt.

Why or when might I sell Netease?

I try to avoid selling stocks just because I think they've gone up "too fast" or "too far" -- is there really such a thing? It can be very tempting to conver the paper profits scrolling across your ticker into cold, hard cash -- but I don't think it makes much sense to look backward like that and think only about your purchase price and the price you could now get. Look at the company -- is it still growing? Are prospects better or worse? Is the news that pushed it up so high really news that makes you understand the company differently and place a different value on them?

In the case of Netease, yes, now that I've seen the numbers they got for Fantasy Westward Journey and the growth they're capable of in their gaming business, I see no reason to sell. I might get clobbered if the chinese decide to destroy their most successful technology industry, or if competitors just beat early movers SNDA and NTES, but I have no reason to think either of those outcomes is probable. I'm trying to invest in companies that have the opportunity for dramatic long term growth -- why would I sell just because some of my hopes have come through?

This is not a part of my portfolio that I'm relying on to supply me with cat food in my old age -- I'm going to let it ride.

If Netease appears to development management "trouble", that might be a reason for me to sell (their management seems to have been pretty conservative thus far, from what I can tell, but I don't have as much confidence in them as I do in the leadership at Shanda). Other than that, as long as the Chinese economy continues to build a middle class, the government continues to support private enterprise, and the Chinese people continue to have an interest in low-cost entertainment, I see no reason to sell Netease.

There's a good Fool article here by the guy who recommended this in the Rule Breakers newsletter, if you want to read more.

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Earnings Updates

About half of the companies I own have reported their quarterly earnings, and it is a decidedly mixed bag. I'm going to do a quick summary of how they did, and what I'm thinking about the companies going forward.

So what has happened of significance so far this earnings season?

First, the best ...

Middleby (MIDD) clobbered the baked-in estimates, and showed that CEO Selim Bassoul is still on top of his game at this maker of commercial ovens and cooking equipment. I was lucky enough to buy into this great company earlier this year when it faltered slightly while the founding family was trying to sell out their holdings -- bought some at about $46 and more later on at around $50 over the winter (I found out about this company because it was a Motley Fool Hidden Gems recommendation, one that has since been re-recommended -- that's a great newsletter and I recommend at least giving it a free trial).

Middleby keeps some of the fun in investing by never pre-announcing their earnings release date, so one day the market closes and a lovely surprise bounces up on your browser, as happened last Thursday afternoon. Sales up 15%, international growth still doing great, earnings well above the estimates of the few analysts who follow MIDD ... even with increased debt, which we knew about due to the buyout of the founders shares, and slightly lower margins and higher costs largely due to the acquisition of NuVu and higher steel prices, it's all good news.

Now, some of that might be overstated -- some of the second quarter growth was backlog from Q1's big order volume that squeezed in before a price increase, some of it was from the NuVu acquisition, but I still like the growth going forward. Middleby's fast, efficient, patented cooking systems are being used by many of the restaurant chains that are quickly carpeting the globe with familiar logos and food products, and that doesn't appear to be anywhere near an ending point. Dining out is an international phenomenon, one that certainly began in the United States but that has legs around the world -- and familiar brands that roll out huge numbers of shops with Middleby cooking equipment are leading the way. Even something as seemingly unrelated as energy prices can help Middleby, because higher energy costs mean that the more advanced but much more energy-efficient Middleby ovens are just that much more appealing for restaurant buyers.

And the worst ...

Great Wolf (WOLF) -- bigger, and unfortunately much badder. I was one of I believe four shareholders to not sell out on their latest earnings release, and that could have been a mistake. Thankfully, my WOLF position was relatively small (and is smaller still now) since it's a pretty new portfolio position that I haven't gotten around to really filling out yet.

Normally, if I saw a stock drop like this that I owned and was confident in it would be extraordinarily tempting to buy ... and when I saw the ticker drop like a stone, that was indeed my first reaction, I thought we might just be dealing with a management team that was having a hard time getting to know the "underpromise, overdeliver" Wall Street culture.

Then I read the earnings release, and while I'm holding on because it's not worth selling such a small position and I still have some hope for the company, this one is not going to rocket back up the charts anytime soon. Not only was this a rough spring for Great Wolf in terms of competition eroding their occupancy rates in the few places where they face competition, but man oh man oh man, their occupancy rates fell EVERYWHERE over this six month period, and they weren't exactly super high to begin with. Check out the earnings release here and scroll down to the individual resort results -- nothing promising there.

Now, the silver lining is that Great Wolf is expanding into some very promising areas -- their Williamsburg location openened recently and is getting pretty high room rates, though occupancy is not great yet, and they have very promising parks opening in their core midwestern region -- a partnership park in Ohio and a franchised location in Niagara Falls, Ontario -- as well as some brand new locations that will really be the test of the concept. If they can succeed in the Poconos and in the Pacific Northwest, where the indoor water park is a heretofore unseen novelty, I'll feel much better about their long term future.

So, it's possible that this is a great buying period (A.G. Edwards downgraded it right before earnings, and upgraded it right after with the stock almost 40% lower) ... but not for me, not yet. I'll revisit this holding next year around this time and see how they're doing. The guy who recommended Great Wolf for the fool's Rule Breakers around the time I bought in, has a writeup on his disappointment here, and there's a news article with some quotes from management that are a little less gloomy (though they also give weight to the concern that dependence on leisure spending from the midwest may be a problem for a while with automaker troubles).

And all the rest ...

Akamai (AKAM) reported a great quarter and it looks like the acquisition of Speedera is going to be just as good a decision as we had hoped, though short term cash flow and margins might be a little lower than some were dreaming of. AKAM bumped up a bit on the solid but not breakout news, and I'm happy to keep holding on. Quarterly numbers from the Fool here. Guidance upped about 10%, so it's trading at a pretty fair PE of 30 or so for the current year -- not bad for the growth I expect we'll continue to see.

Marvel (MVL) reported a slightly disappointing quarter, and fell a small amount -- really not significant in the grand scheme of things. Earnings were a little lighter than last year and the spiderman 2 licensing cash flow wasn't quite as long lived as some analysts had hoped -- hard to get worked up about it. They're still backing earnings estimates of a bit over a dollar for the year, which means they're pretty close to a market multiple even in a year when they don't have a blockbuster franchise release (F4 has been a solid hit so far, but it's certainly neither an X-men nor a Spiderman when it comes to blockbuster ticket sales or licensing -- we'll see the next X-Men next year, and Spidey 3 the year following ... plenty of reason to buy huge potential at a fair price right now if you're interested).

MEMC Electronic Materials (WFR) reported a slight drop in earnings, but what I'm looking for from them is in the future -- the next 6 months to a year. Now that the backlog is almost worked out of world semiconductor inventories and business is beginning to boom again, what kind of advantage will WFR be able to gain from having their own low-cost supply of polysilicon? And even without the impact of that, world demand for wafers should be very strong. Earnings made the shares drop slightly, but investors, including me, are mostly interested in what happens for the next year -- is the semiconductor recovery for real? If so, WFR and FORM will boom. According to MEMC's CEO, the company's results may indicate "the bottoming quarter" after a 9-month industry slowdown due a surplus of inventory. I hope he's right.

Formfactor (FORM) reported just a few days after I did my company writeup, and altough the stock tumbled a bit due to delays in the new plant going online, my opinion hasn't changed -- I'm still happy with them, and the market has already found some of the love it had lost for FORM, it has recovered about half of it's earnings-miss fall.

Vertex Pharmaceuticals reported too ... but I don't much care about their quarterly earnings, for this one and all my other biotechs the earnings matter much less (they're all still losing money, though PDLI is close to going cash-flow-positive) than the results of their ongoing clinical trials. The trial results will move the stocks, the earnings almost never do unless they're wildly surprising. VRTX's report was pretty much as expected, and, most importantly, all of their trials for potential blockbuster drugs are on schedule -- nothing pending that should be a big surprise or impacton the stock in the next few months as far as I can tell.

Next Week

I'll have to do this again in a week or two -- I'm taking a no-market-info vacation, which is painful for info addicts like me, and during that time earnings should come out for Click Commerce, CV Therapeutics, Exelixis, FARO Technologies, Lions Gate Films, Protein Design Labs, Rofin-Sinar Technologies, Shanda, Taser and Universal Display. Almost all of these companies are reporting on either Monday or Tuesday of next week, so I'll at least have to read a paper or two while lounging at the beach.

And to add to that, Netease reports tonight (preview from ChinaStockBlog), and Overstock and Radyne tomorrow ... and the biggest quarterly non-event of all, the Berkshire Hathaway quarterly earnings release, is coming at the end of this week. This is way too much to absorb if you're planning on acting on the information that all these companies release, so I guess it's a good thing that I almost never react to quarterly earnings -- my account isn't big enough that I can afford to do much active trading, and I generally use a long time horizon when evaluating my portfolio companies (with some exceptions).

Unless management loses my confidence, or I see a trend developing that counters my long-term investment thesis for a particular company, I'm not going to buy or sell based on whether they hit or miss their numbers (though I am often tempted to buy when companies have short term problems that impact their share price -- as I wrote about in Catch a Falling Knife -- it turns out I should have jumped on FARO when they fell, and on Formfactor when it fell a bit later ... Shanda's still roughly where it was when I wrote that, and I have bought a small position in Jan 06 $40 call options in lieu of more shares to leverage my firm belief that it's got to eventually stop being the most undervalued tech company in China and break out of the top of this trading range it's stuck in).

But that's not to say that I don't watch earnings pretty closely, and still get excited to read up on what my companies are doing and have my choices reinforced by good news or challenged by bad news -- that's just human nature. So here's looking forward to a strong week of earnings releases, and a dozen or so good conference calls with enthusiastic, optimistic management teams. I'll write about what I think of what happened in about two weeks.

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Wish list 2 -- ISRG, OLED, ERJ

If only I had an unending supply of funds coming in, then I could buy shares of all the companies I get excited about owning.

Even though I try to avoid some wide swaths of the market because they're already well represented in my mutual funds or retirement accounts and I can't compete with the analysts for information about them -- sectors like megacap companies, for example, or utilities or dividend plays for the most part (aside from some REITs) -- I still get tempted by some companies in those areas.

And in the area where I focus most of my energy, small and mid cap growth companies, the applicants for my portfolio seem to stream in almost endlessly.

I usually have funds available to make one or two investments a month, whether in companies I already own or in new candidates (most months, I try to do one of each -- it's another Lynchism, and I agree, that "the best stock to buy may be one that you already own"). Here are a few that have gotten me interested lately.

Intuitive Surgical (ISRG)-- man, do I wish I had bought this one last week. It has gone up almost 30% since their breakout earnings, and I winced all the way up as I checked my watch list in Yahoo Finance. I understand the principle that successful companies may never be avaialable at a market multiple, but fretting about whether to buy a company that has already gone up so much in a short period of time still gives me the shakes. Was turned on to this from one of my newsletter subscriptions (at the Fool), and it's taking me some time to really understand the company enough to buy in.

These guys make robots that allow for less invasive, more precise surgery. And while they're expensive machine, they also provide the service and ongoing software, etc., so they have more than just lumpy, one-time revenue. They appear to be in hyper-growth now, we'll see if I can convince myself that it's still OK to buy.

Cambridge Display Technology (OLED) -- you may have noticed that I own one of the intellectual property banks of the next phase of display technology, PANL (though I haven't written them up in detail yet). I'd like to own both (not including Kodak here, though they have important patents, because I don't like the larger business), since both of these businesses, churning money though they are today, have different technology approaches and may well both be successful in the long run. Universal Display (PANL) seems to be the best bet to take off first, since they've come close to putting a full spectrum PHOLED together (just developed the first blue pholed that meets manufacturing requirements, but it's not quite the right kind of blue for full color -- that's the primary reason for the most recent price bump, IMO). PANL also has already released a product in a mobile phone, and have some defense dept. contracts to develop really cool flexible displays for soldiers (and have added Samsung as a licensee, which brings some hope for future big business).

The different approaches of these two companies may well both pay off big, since OLED may well be better for big displays and PHOLED for portables. Both have great research operations and patents and show great promise. While I think PANL has great technology that we desperately need for portable devices to allow smaller toys that drain less power, and that puts them in the sweet spot right now to match the strongest need, I've read that OLED's technology might work better in the large, television size displays that we ought to see in a few years. So I've held off on buying OLED since it seems like I'll have some time before they reach the point where they have production contracts with manufacturers that might accelerate their earnings dramatically, hopefully I won't miss the boat on this one.

Embraer (ERJ) -- anyone who watches the market at all noticed Boeing's great earnings release recently. Airbus is getting solid orders for their mega plane, but Boeing's smaller new planes that promise greater efficiency are looking like a big hit. I think both companies will continue to be successful, but Boeing is already so over-covered by analysts that they're not going to surprise anyone too much in the long term.

Embraer rides the same trends, increased air travel worldwide and a focus on more efficiency, with smaller jets flying more frequent direct routes and less focus on overloaded 747s feeding hub airports. ERJ has the benefit of being under the radar for many folks, since they're Brazilian, and also having a nice low valuation since people discount for the sometimes frightening Brazilian economy and politics (I used to hold Petrobras for this same reason, though I sold a bit too early this past winter).

I think their well-priced smaller planes, which are already being used by many major carriers, will be very successful in the United States and elsewhere (with the corporate jet business providing some gravy). Even with the recent success of Boeing I think many investors overlook the good prospects for aerospace -- airlines are a terrible investment in most areas of the world thanks to competition and high oil prices, but their equipment suppliers should do much better if they can provide a better, more efficient product that helps them cope with fuel prices (kind of like how Toyota is selling Prius hybrids to us fuel-strapped Americans). Air travel is only increasing in the long term, and the world is becoming more connected -- China's catching up with the US's position as the world's largest consumer of air travel, and although I wouldn't buy a Chinese airline, I might buy an airplane manufacturer that could sell them some great planes.

My first wish list is still linked here, if you're interested. Or if you want to make a donation to enable my investment in any of these companies.

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