Home > Stock Analysis

A Defensive Tech Play

Posted: Nov 18, 2009 12:27 PM by Sham Gad

Tickers in this Article: GOOG, AMZN, COL, LLL, VSAT

Investing in tech-based companies isn't for everyone. Many people are intimidated because they feel they don't really understand the technology enough to make an informed investment decision. Sure, every decade or so the market may throw you a more obvious choice like Google (Nasdaq:GOOG), but for every Google or Amazon (Nasdaq:AMZN), there are hundreds of companies that have appeared just as excited but failed completely. But there are tech companies worth looking at.

IN PICTURES: 7 Forehead-Slapping Stock Blunders

Playing Defense
ViaSat (Nasdaq:VSAT) may be one such company. ViaSat produces innovative satellite and other digital communication products that enable fast, secure and efficient communications to any location. The company's innovative communication applications are used by both commercial and government sectors. When you consider the need for such devices and applications for the military and other U.S. defense needs, the market size is enormous.

Get Free Stock Analysis By Email

In fact, a majority of the company's sales are defense related, one of the biggest and most stable of all government spending programs. On the commercial side, the growing use of wireless broadband bodes well for ViaSat as its recent acquisition of WildBlue, a leading U.S. broadband satellite service provider, gives ViaSat a huge push into this market.

Quality Track Record
Revenue has increased since 2003 from just under $200 million to over $600 million expected in 2009. Such excellent sales growth is in no doubt due to the continued growth in the defense business, although the commercial side has been just as consistent. EPS growth has been just as impressive from around 60 cents in 2004 to $1.50 today. For 2010, ViaSat is expecting both top and bottom line growth.

Shares currently trade for about $30, valuing the company at approximately $950 million. The current P/E multiple of 23 may seem a bit rich for most bargain-oriented investors. But it may be worthwhile to consider some other qualitative factors in this case.

First, the company had a pretty solid quarter, in which the company announced new contract awards over $220 million, bringing the year-to-date total to $320 million. This figure is more than half of current backlog of $500 million. Indeed, the new contract awards amount is less than the previous year, but it still represents a healthy figure during such a terrible economic environment.

The other consideration, and one that I find very compelling, is that Baupost Group, the noted investment vehicle of Seth Klarman, owns 4.6 million shares, or nearly 15% of the company. Baupost's track record speaks for itself, and any investment that they make should certainly be explored.

Be Prudent
Despite what appears to be a quality business, investors must always examine the facts for themselves. Klarman's investment is a huge seal of approval, but it's not like ViaSat doesn't have competitors. And some of them include defense giants L-3 Communications (NYSE:LLL) and Rockwell Collins (NYSE:COL) who clearly have much deeper pockets and deeper connections. ViaSat bears a closer look but a prudent one, nonetheless. (To learn more about defense and other forms of "sinful investing," see: A Prelude to Sinful Investing).

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS