This week, as we remember 9/11 I thought it a good time to focus on defense sector stocks. While the state of the U.S. economy, and our dependence on foreign oil garner the lion’s share of attention during this election cycle we mustn’t forget that we’re still at war, and our enemies’ capabilities still warrant our respect.
Big companies such as Boeing (BA), Lockheed-Martin (LMT), Raytheon (RTN) and Northrop Grumman (NOC) dominate the headlines in the defense sector, but don’t overlook the companies that operate as subcontractors and that aren’t covered widely by the financial news media.
Endwave Corporation (ENWV) is one example. ENWV has almost no following by stock market analysts and rarely makes headlines. Endwave designs, manufactures and markets technology that enables transmission, reception and processing of high-frequency signals in telecommunications networks, defense electronics, and homeland security systems.
ENWV currently has 43 patents covering its semiconductor and proprietary circuit designs. Endwave’s products are used in a wide array of defense and homeland security products, including unmanned aircraft, attack helicopters, secure satellite communications and airport weapons detection systems.
Earlier this summer, ENWV was awarded an 18-month contract from defense giant Boeing (BA) to supply broadband frequency converters used in the Air Force’s Airborne Warning and Control System (AWACS) 3035 system. AWACS provides airborne surveillance, and early warning detection and tracking of low-level targets at extended ranges over land and water (see “Boeing (BA) Stock Strikes Back“).
Endwave also has a commercial telecom business where it is one of the largest suppliers of microwave point-to-point radio subsystems. This business contributed 79% of total revenues in 2007, but it is in defense electronics and homeland security where the ENWV sees its biggest growth opportunities.
Of course the company is hostage to politics. The allocation of resources from the Defense Department almost never comes in when expected and that makes it hard to gauge the company’s performance from quarter to quarter and year to year.
One thing that is more certain is the company’s solid balance sheet. ENWV has about $4.60 per share in cash and no debt. Such a cushion allows the company to withstand periods when orders don’t come in as expected.
Interestingly, shares of ENWV trade for about $5.50 meaning the business is worth less than a buck if you take out the cash. That is a far cry from the $10 plus shares fetched last fall.
If John McCain is elected, investors could see a continuation of big defense spending. That should bode well for companies like ENWV. It seems like the risk-to-reward ratio here is reasonable (see, “Red Stocks, Blue Stocks“).
Keep in mind that ENWV is a small cap stock that is thinly traded. That means share price could be more volatile.
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