Sell #4 -- Radyne Corporation (RADN)

This is the fourth of my promised four sells, though I have a couple more that I may take off the table or reduce my stake in in order to make some new purchases.

I sold Radyne Corporation (RADN) this morning at $15.78, locking in a roughly 100% gain in about 18 months (bought last January at $7.86). This is a bit of a turnaround for me, since I last wrote in the fall, when the shares were bumping up after great earnings and hitting $13 or so, that I was hoping to hold and ignore this very quick grower.

Turned out a little differently. So why did I sell today? Well, in looking through my sale candidates this was one of the very good performers whose growth I wasn't really clear about going forward. RADN had a huge bump up over the past year or so with the acquisition of a like-sized competitor in their space (satellite modems, etc.), and I think that initial growth was a big part of the reason for their extremely rapid ascent -- were it not for the Xicom acquisition, I expect I'd still be holding this company and expecting 20%+ growth annually.

But after 100% growth in one year, from a company that has gone from totally undiscovered and dirt cheap to a level where it's certainly priced for some significant growth expectations, I feel like this is a good time to take it off the table.

I don't expect dramatic growth from RADN in the near future, though it's possible that I'm wrong and I'll have to watch from the sidelines as it doubles again. In this case, though, I wouldn't buy it here at a 25 trailing PE -- I don't have a strong enough feeling about their competitive positioning in this very active and competitive business to assume that they'll be able to grow quickly enough to justify that pricing. And the forward PE of 20 is just about a wild guess, given the extremely limited analyst coverage.

In the end, though I did plenty of math and reviewed the company's financials carefully, it probably comes down to the fact that I wanted to take some profits to go along with the two losing positions I sold earlier (SNDA and TASR).

And Radyne was the fast grower that I was least sure of going forward, both because of the company and the industry/sector, so it gets thrown off the boat. The industry is one that's not terribly transparent to me. Satellite communications, especially for HD TV and military uses, which are areas that RADN works in, seem to be a growing industry -- but I don't have a real sense of the market size. We're dealing with the ground based modems, amplifiers, and uplink/downlink equipment that's used by tv producers to transmit sports events, for example, and I don't have a good handle on the upgrade cycle or the additional growth in this business once the basic infrastructure is built out and everyone has a basic level of equipment ... which is what I sense to be the situation today.

I think that we individual investors often have trouble in reassessing companies when they may be in periods of transition -- Radyne seems to me like it has significantly increased its market cap and capabilities, brought all those new sales under the tent, but perhaps might have trouble continuing to grow the market cap from this new larger base given their significant PE expansion -- from well under 15 to 20+.

Whether or not my instincts on this are to be trusted is a matter for another day -- this remains a teensy company that could easily move up or down in completely unpredicted ways. I'll try to remember to look back at this wave of selling in a few months and see what happened to my orphaned companies.

Until then, it's time to continue looking for bargains among the rubble of the last few days of trading -- I was happy to pick up Chico's and Click Commerce shares recently, and I'm carefully considering which of my other holdings might be a good place for a new injection of cash.

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Earnings updates

It's a very busy earnings week for me, and as luck would have it I'll be traveling for a week or so and won't be able to post for a while. Here are my quick thoughts on the companies that have reported recently:

Taser (TASR) this morning finally finished filling in and sealing over the hole they had dug for themselves over the past year or so. They are now building sales again, and you can practically taste the market's relief. Lawsuits are becoming a non-issue since Taser is handily winning all of them or having them summarily dismissed, but that's not enough to boost the shares -- what they need is a return to significant sales growth. It seems to finally be starting, so even though they missed estimates slightly the shares are rallying a bit on 30% sales gains and hopes for a return to TASR's perch as a fast-growing company with a monopoly on its core products. I've been patient with Taser even though it's well underwater for me, and I plan to continue to patiently watch as it returns to sales growth, hopefully some earnings growth, and a recovery of the stock's valuation.

Keppel Land was a little bit light on earnings yesterday, which brought the shares down and depressed parent Keppel Corporation (KPELY) , which I own, a bit as well. I just bought these KepCorp shares at pretty much their recent highs, and I knew it was earnings season so I was taking a risk ... the real news for Keppel, however, will come with tomorrow's release of earnings for the parent company and any updates to their guidance about yard expansion, size of the order book, or other commentary on the great market they're seeing for their deepsea drilling rigs. Could move either way on these earnings tomorrow, but in the long run I expect the shares to do very well even though they're not in the bargain bin.

Rayonier (RYN) reported earlier this week, and a quick look at the numbers made shareholders very nervous. Nothing to worry that much about, earnings were down fairly dramatically due to the timing of some land sales (they're not selling as much wholesale land now, they're trying to move up the development chain and get more value, which is taking more time), and to some other seasonal weakness in the business. RYN's earnings have never been all that consistent, but in the long term I'm happy to have a strong position in my portfolio in Rayonier as it represents investments in land and timber which should remain a good diversifier for me.

Radyne Corporation (RADN), which I bought about a year ago as Radyne Comstream, reported continued earnings growth as well -- I have some nervousness about holding this one because it has grown so fast, but I have to remind myself of what a bargain it was when I initially picked up shares. The Xicom merger is clearly working very well -- it might have nibbled at their margins a little, but sales and earnings growth have been very good, they're getting paid (receivables are dropping), and their order book has grown dramatically so they have a very solid backlog to supply. I'll be watching RADN to see if there's any weakness or overvaluation that might make me want to lighten my holdings a little, but I don't see that yet -- and even after this big merger and a year of torrid growth this is still a tiny $300 million company with a lot of room to grow its presence in the satellite telecom business.

And Gol Linhas Aereas Inteligentes (GOL) released earnings a couple days ago, too -- they beat the estimates of the Street by a little bit, though it didn't really impact the share price since expectations had been steadily gaining. The big impact of Varig's problems probably won't show on their earnings for a quarter or two, assuming they continue to gain market share as I expect, but they are still showing good steady growth in income, cost cutting, route expansion (just opened up to Chile), and they're getting more attention from US investors. GOL continues to look like a great long term story to me, though I wouldn't be surprised to see them temporarily lose altitude at some point after the remarkable six months they've had.

Akamai(AKAM) , Formfactor(FORM) , and MEMC Electronic Materials (WFR) are all reporting today, and Intuitive Surgical (ISRG) tomorrow -- all very strong performers over the past year with gains of well over 100% (though not all have gained quite that much for me, I bought ISRG fairly high). These companies have pretty huge expectations built in, but it seems to me that their markets are booming and they should have no trouble meeting those high expectations, or at least coming close. All still look like long term winners to me, though I am a little concerned about valuation with Akamai and, to a lesser degree, Formfactor. Not enough to sell out yet, but I will be looking closely at their results to see if I'm still willing to be that their growth is going to continue at these rapid rates.

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Radyne's still got it!

Boy, from a sleepy little stock to a small cap superstar that shoots up with earnings announcements -- life is fun for folks who follow Radyne (RADN -- get free real time quote from ADVFN). Great earnings release this afternoon.

I could just republish virtually the whole writeup I did when Radyne last released earnings in August, it all holds true the same as it did that day ... but you might as well just go back and read the original -- the Xicom acquisition is now looking even more brilliant, and free cash flow is allowing them to pay off some of that debt and start building a cash position again.

I'm as pleased as I can be about these numbers -- growth if you back out the Xicom numbers is great, and growth if you include the Xicom numbers is spectacular. Even so, as we shoot past $12 in after hours trading (you never know if that will stick, but it's fun to see), I see a company that is still very much out of the limelight and undercovered by Wall Street, in a growth industry, and with a recent acquisition that they're just starting to leverage into dramatic growth.

Radyne was a steal over the winter, and now it's just a good deal and an undervalued growth company. I will continue to sit and hold these shares with a smile on my face.

Shares came back to earth a little bit after the last earnings bump up, but I think people might start to really believe in the growth that's possible for RADN in the coming few years (and who knows, maybe the 2009 deadline for HDTV will really stick and the networks will sink some more money into HD equipment -- stranger things have happened!).

Going forward, I'm planning to try to ignore this little rocket and hope to look back in a couple years to see it at $25. My primary concern in August was the fact that RADN was no longer debt-free, but it certainly looks like they borrowed money for some very, very good reasons. I'm going to have to come up with something new to worry about, which seems unlikely as long as this management team keeps hitting it out of the park -- so I guess I'll have to fall back on an old favorite, insider holdings. Radyne is heavily insider-held, which I think is usually great for a small, growing stock like this because management is really working for our best interests. So I guess I'll just hold off and start worrying if and when management starts dumping shares and heading for the exits, which seems unlikely.

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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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