This communications equipment company is trading at undervalued levels, yet it has great market share, significant cash and no debt.
Norsat International, Inc. (NSAT)
From The Cutting Edge
Norsat International Inc. (NSAT, NII.TO) is a small, $38.95 million communications equipment company with a long list of big name clients and one of the most obvious value propositions on the market. It probably won’t be the most exciting company we’ll add to our portfolio this year, but the company has a limited downside and a solid long-term outlook.
Norsat is a leading provider of communication solutions that support data transmission for remote applications. It provides microwave components (for reliable satellite transmission), portable satellite systems, maritime satellite systems, and various remote network solutions. Through its Sinclair Division, which accounts for just over half of revenue, Norsat is also leading provider of antenna and radio-frequency conditioning products. Sinclair provides coverage solutions for public safety, defense, and private wireless networks.
Norsat’s products and services are used extensively by telecommunications providers, emergency services, homeland security agencies, military organizations, health care providers, news organizations, and a slew of Fortune 1000 companies. Notable government clients include NATO, the Department of Defense, Marine Corps, Army, Navy, and Air Force. Notable commercial customers include FOX News, CBS News; Boeing, Reuters, Motorola, TESSCO, and General Dynamics just to name a few.
To date, Norsat has sold over 2.5 million satellite and antenna products to 87 countries worldwide. Headquartered in Vancouver, the company is consistently ranked among the top technology companies in Canada and was recently named one of the fastest growing companies in the region by both Canadian Business Magazine and Business Vancouver.
Trailing twelve-month revenue for Norsat stands at $37.25 million, putting the company at a very attractive 0.95 sales ratio. Trailing net income is $9.51 million which puts it at remarkably a low trailing PE of 3.72. For perspective, the Shiller S&P 500 PE currently stands at 25.26 and the communications equipment industry average is 24.50.
Adding to the value case, Norsat has no debt and $9.32 million in cash. At a $35.95 million market cap this puts the enterprise value at $26.51 million.
When you account for cash and look at enterprise value, Norsat’s business is actually valued at a trailing price to earnings ratio of just 2.70. That’s almost ten times more bang for your buck than the average company on the S&P.
Norsat’s margins are simply superior with respect to its peers. Profit margin for the firm was last reported at 10.44% with its closest competitor Adtran Inc. (ADTN) at 6.29%. The company hasn’t reported a quarterly net loss in over five years.
One thing we especially like about Norsat is that the company has remained consistent for the last five years with respect to revenue generation and profitability. For a business that relies heavily on contracts this isn’t exactly typical, but Norsat has done well enough identifying opportunities and diversifying its product lineup that it’s managed to keep cash flow steady.
R&D investments for product development continue to be a priority for Norsat, which is also something we like to see. During the quarter, the company launched its MEDIAN 40W Ku-band Block Up Converter (converts satellite frequencies) along with a range of LNBs (receiving devices mounted on satellite dishes TV reception) to its microwave product line.
Late last month, Norsat received an approximate $3.8 million order from Harris Corporation (HRS) for its ATOM series Solid State Power Amplifiers (SSPAs), another recent addition to the product line. Speaking to Norsat’s stickiness, the company has been working with Harris since 2013 in order to develop and deliver custom SSPAs.
Looking further out, Norsat aims to leverage its profitability and strong cash position through aggressive R&D and strategic acquisitions. The company is focused on expanding its presence geographically as well as within respective market segments.
Norsat trades on multiple exchanges. We rate Norsat International Inc. a ‘Buy’ under $6.75 and Norsat International Inc. (NII.TO) a ‘Buy’ under $8.75.
The risk level is Low.
Jason Stutman, The Cutting Edge, www.angelpub.com, 877-303-4529, August 16, 2016