Sector Watch: Wireless communications
Worldwide use of wireless communications is expanding rapidly.
According to a telecommunications industry report, in 2006, the U.S. corporate, government and educational sectors spent nearly $9 billion on deploying wireless networks. Expenditures are estimated to be growing 25% per year. Spending in the international market was estimated at $28 billion last year and is estimated to be growing 33% annually. A report issued by The Cellular Telecommunications & Internet Association indicates that wireless carriers spent $33 billion on capital investments and expenditures last year and are increasing spending at a 14% annual rate.
Carrier investments are driven by explosive growth in the number of wireless users; in June 2006 (the latest period for which data were available), there were approximately 219 million wireless subscribers in the United States, up 25 million, or 13% from a year earlier.
Increasing demand for wireless networks is attributable to the improved security of wireless data transmissions, the introduction of new, more advanced technologies, greater accessibility and affordability of wireless mobile devices, and expanding capacity of wireless networks, making wireless an acceptable alternative to land lines.
The advantages of wireless communications versus traditional land line networks include:
- Mobility. Mobile communications allow data to be transmitted from remote staff and locations not accessible by land lines. As a result, data collection costs are reduced, access to data and data controls improves and worker productivity climbs.
- Capacity. Current technology allows wireless transmissions with capacity, quality and reliability superior to land line and comparable to fiber optic networks.
- Cost. Wireless networks are much less expensive than land lines to deploy and operate. In addition, wireless equipment costs are declining as a result of technology advances and production volume increases. In addition, wireless networks bypass local service providers, eliminating recurring monthly fees.
- Deployment. Wireless networks eliminate the need for negotiating rights of way, infrastructure engineering and additional FCC licensing. They can be deployed quickly and inexpensively.
Two small caps that are benefiting from wireless demand are WPCS International Inc. (Nasdaq: WPCS) and Anaren, Inc. (Nasdaq: ANEN).
WPCS International
WPCS provides design-build engineering services for specialty communication systems and wireless infrastructure, including site design, integration, structured cabling, electrical contracting, trenching, construction and maintenance. Its customers include businesses, government agencies and educational institutions.
This month, WPCS announced $4.6 million in new contract awards, including projects for the North Tahoe Public Utility district, the County of Sacramento, St. Joseph’s University, ADT, Connecticut Water, the U.S. Navy, Rutgers University and the Port Authority of New York and New Jersey. In the fiscal year ended April 30, 2007, WPCS’ revenues grew 34% year-over-year to $70 million from $52 million, and earnings climbed to $4.6 million, or $0.72 per share, from a net loss of $1.6 million, or $0.40 per share, last year. Recent acquisitions support a favorable future growth outlook.
Also this month the company acquired two businesses, Major Electric and Max Engineering, which together represent nearly $18 million in annual sales. Both acquired businesses have historically been profitable. Analysts expect WPCS to produce 22% growth this year, and we forecast longer-term growth approaching 20% annually. Our $16 price target for WPCS is 50% above the current share price.
Anaren
Anaren designs, develops, manufactures and sells highly integrated microwave component assemblies and subsystems for the wireless communications, satellite communications and defense electronic markets.
Recent contract awards for this company include a $6 million contract with Lockheed Martin Corporation (NYSE: LMT) for radar warning receiver subassemblies, an $11 million contract with Northrop Grumman Corporation (NYSE: NOC) for assemblies used in S-band radar, a $4.9 million military contract and an $8 million contract with Lockheed Martin for radar on a military helicopter.
During the nine months ended March 31, 2007, this company increased sales 22% year-over-year to $93 million from $76 million and grew income 61.5% year-over-year to $13.1 million from $8.1 million. Because of an accounting error by its China subsidiary, Anaren believes it will likely be required to restate nine-month earnings and anticipates earnings for the nine months ended March 31, 2007 ranging around $11.9 million, or $0.66 per share, up from $$7.5 million, or $0.42 per share, in the same period last year.
Analysts predict this company will generate 26% growth this year and longer-term growth averaging 15% annually. Our $22 price target for Anaren is about 25% above the current share price.
