You may not have heard of Technical Communications Corporation (NASDAQ:TCCO) until recently. However, the company has been in business since the late 1960s, providing communications security devices and systems. Its customers, over the years, have included governments, military agencies, telecom companies and banks, among others.
While TCCO has had a long history, the last decade was a rather lean one for the firm. From 2010 on, the stock lost as much as 90% of its value before the recent recovery. Between better operating results and the increase in military activity in the Middle East, however, things may be turning up for TCCO.
Technical Communications Corporation: A Small Player
TCCO is not a powerhouse technology firm. In fact, the company has less than $2 million of cash, and has generated less than $10 million in annual revenues for many years now.
The company is so diminutive in size, for example, that it borrowed $300,000 from its CEO, Carl Guild, in August for working capital purposes. The company repaid the CEO in September. Taking out loans of that size for a month is the sort of thing that mom and pop businesses do to make payroll, it’s not such a common activity for Nasdaq-listed tech companies.
There’s nothing wrong with being a tiny business. But investors should be careful. Most businesses that small tend to be private; you pay a lot of costs and use a lot of management’s time on compliance with fulfilling the requirements of being a public company. Companies this small don’t tend to have a great track record historically compared to market indexes as a whole. TCCO stock in particular has traded publicly since 1983, when it went for $15 per share. Since then, it has lost the majority of its value, despite two phenomenal bull markets over that stretch.
Also, consider TCCO’s, research and development budget. It spent only $333,000 on R&D for fiscal year 2019. Needless to say, that’s not the sort of spending level that will generate lots of new products or intellectual property going forward.
Things May Be Turning Up
2019 was TCCO’s first big up year in awhile. In particular, last quarter was shockingly strong. The company announced revenues of $2.7 million for the quarter, and net income of $1 million. Given the company’s microscopic outstanding share count, this translated into 56 cents of earnings per share. That’s a stunning figure for a company that was trading at $2 prior to the news. Annualized, TCCO stock would be trading at just a couple times earnings if it can keep making similar quarterly profits going forward.
However, it likely won’t be that simple. It’s unclear how much of TCCO’s improved results were from one-time business and how much will be ongoing, though the company does note recurring revenue opportunities.
The Iran Factor
Historically, TCCO has generated a substantial chunk of its revenues from sales to foreign governments and entities. It’s worth noting that three of the company’s four top foreign markets in 2018 and 2019 were in the Middle East, with TCCO counting Saudi Arabia, Egypt and Jordan as lead customers.
Also, TCCO has benefited from past U.S. involvement in the Middle East. For example, the company routinely won contracts to provide parts for encrypted radios in Afghanistan. In a past press release, TCCO described the value of its DSP 9000 technology in the Afghan theater:
“It also has the unique capability to securely connect allied forces across theaters on a global scale regardless of their communications equipment. With the DSP 9000, U.S. and NATO, and Afghan forces can communicate securely during tactical operations. The DSP 9000 has proven in-use performance with government agencies and armed forces around the world, including major deployments in the Middle East, Africa, Latin America and Southeast Asia.”
With all that in mind, the recent escalation of aggression between Iran and the U.S. could put TCCO stock into play. There could certainly be more demand for military radios if the situation in the Middle East becomes more violent. Notably, TCCO stock traded up from 50 cents per share at the outset of the Iraq War in March 2003 to $3 by the end of that year. History might repeat.
TCCO Stock Verdict
A lot of people are interested in TCCO stock because shares soared last month following the blockbuster earnings report. And it was truly a breathtaking move, to be certain. At this point, though, make sure you fully understand the risks before investing in the company.
The business is tiny, with revenues coming in under $10 million a year. Between 2012 and 2018, it lost money each and every year as an operating business. For a tiny company like this with minimal analyst coverage, it’s difficult to forecast whether this bump in revenues last quarter will be the start of a corporate turnaround, or simply one great quarter.
TCCO could take off from here. But it could easily go back to making losses, and the share price would slump with it. And on a stock like this, once the short-term traders leave, liquidity dries up, making it difficult to exit your positions. Despite the big run-up in the share price last month, this is not an attractive stock for short-term trading, particularly if things cool back down overseas. If you buy, make sure you are comfortable with the firm’s long-term prospects.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.