Argon ST: Defense contractor stays on target for growth
When Argon ST, Inc. (Nasdaq:STST), a supplier of guidance and detection equipment for military and intelligence applications, reported record revenue of $88.4 million for its fiscal second quarter ended March 30, CEO Terry Collins decided to take a pass on the May 8 conference call with analysts.
He had a good excuse. As EVP Victor Sellier explained to the analysts on the call, a potential Department of Defense customer had scheduled an oral presentation on a bid by an Argon-led team for a multi-year project “with potential value to the company of hundreds of millions of dollars.” The company felt it was necessary for Collins to take part in the presentation, even though it conflicted with the call, and hoped investors wouldn’t mind.
The analysts didn’t seem to mind. BB&T Capital Markets analyst Michael Lewis got off the call and upgraded Argon to “buy” from “hold,” and Oppenheimer analyst Myles Walton put out a report reaffirming his “outperform” rating and $25 price target on the stock while adding a couple of ticks to some earnings estimates. The $88.4 million in second-quarter revenue, a gain of 38% from the year-ago quarter and 19% from the previous quarter, widely exceeded Oppenheimer’s $78 million estimate.
Although order backlog was down 13% year on year, chief operating officer Kerry Rowe said the company was experiencing a “perfect storm” in new proposals, dealing with eight to 10 major proposals in the last 45 to 60 days. Despite the sagging order backlog, the company reaffirmed its guidance for $325 million to $345 million in fiscal-year sales; Oppenheimer raised its estimate to $340 million from $335 million.
Argon ST, headquartered in Fairfax, Va., was formed in 2004 when Argon Engineering Associates, a privately held company founded in 1997, executed a reverse merger with SenSyTech, a company that traces its history back to 1968.
The company serves the so-called C5ISR sector — command, control, communications, computers, combat systems, intelligence, surveillance and reconnaissance. It develops systems for signal intercept and identification, airborne imaging systems, threat warning systems, electronic intelligence, active electronic warfare systems, communications reconnaissance systems, torpedo countermeasures systems, imaging systems, communication systems, wireless networks and navigation systems.
In the most recent quarter, Argon’s operating margin was flat year over year at 10.1%, but 90 basis points ahead of the 9.2% estimated by Oppenheimer, due to a better product mix, according to the Oppenheimer analysts.
The higher-than-expected margin enabled Argon to beat the consensus estimate of $0.20 a share in the quarter with $0.25. For the current quarter (ending June 30), the consensus estimate is $0.23, rising to $0.27 in the fourth fiscal quarter for an estimate of $0.94 for the fiscal year ending Sept. 30 (compared with the actual $0.65 in fiscal 2007). For the next fiscal year, the consensus estimate is $1.12 EPS, with Oppenheimer nudging its high estimate up to $1.19 from a prior $1.18.
After dipping below $18 just prior to the May earnings announcement, Argon has shot up to $24.14 at closing on Friday, approaching the 52-week high of $24.69 set on June 18 last year. The mean target among the six analysts tracking the stock is $25.67, with a high of $26 and a low of $25. The stock remains well off its historic highs above $35 in the year following the merger with SenSyTech. Its current market cap is $520 million.
While analysts are clearly bullish about Argon (all six that follow the stock are now in “buy” column), they will be watching closely to see how the touted opportunities for new projects translate into actual orders. With only $74.1 million in new orders in the most recent quarter, the book-to-bill ratio (orders compared with sales) was only 0.84, compared with the company’s goal of 1.2.
For future growth, the company is counting on what it calls its “full cycle program strategy” — accompanying a product from early development stages through production in a long life cycle. In the May conference call, EVP Sellier cited the example of the Common Range Integrated Instrumentation System (CRIIS) Rapid Prototyping Initiative (RPI), a navigation communication device for dismounted soldiers and low dynamic vehicles. Development of the system relied on a key technology from the San Diego Research Center, which Argon acquired in 2006. This led last year to the successful development and testing of a prototype and to the award of a CRIIS contract in May to a Rockwell Collins (NYSE:COL) consortium that Argon belongs to.
COO Rowe said the project will bring in only a few million dollars as the company continues to develop the architecture but will generate revenue in the “high tens of millions” when it enters the production phase in 2010 to 2012.
Argon seems to be right on target for continued growth.
