In the last week alone:
- Israel was hit by 700 rockets from Gaza
- North Korea tested its latest nuclear-capable missiles
- Iran threatened to unleash war on the United States Navy
A high-tech, small-cap, military equipment company is about to reap the rewards of this increasing geopolitical mayhem…
Our intensive research and extensive due diligence have uncovered Technical Communications Corp. (NASDAQ: TCCO), a leading provider of superior-grade secure communications systems and customized solutions to protect highly sensitive voice, data and video transmitted over a wide range of networks. The company’s high-tech product line covers three critical areas:
- Data & Network Encryption – The CipherX® family of network security devices provides strategic-level communications security for global networks, with scalable solutions from 100 Mb/s to 10 Gb/s.
- Secure Radio – The DSP 9000/HSE 6000 radio encryption products military communications over HF/UHF/VHF channels with exceptional recovered voice quality.
- Secure Mobile/Telephone – The CipherTalk® secure mobile phone/encryption and CSD 3324 SPV Secure Voice Telephone Encryption systems provide military-grade end-to-end encrypted voice and text communication.
Government entities, military agencies and corporate enterprises in 115 countries use TCC’s proven products to protect their most delicate and important communications.
And in the military world, secure communications are of extreme importance.
That’s because cryptographic technology ensures safe communication for operations including ballistic missile launches, nuclear submarine deployments, army troop movements, airforce maneuvers and much more.
And today, the U.S. and other governments worldwide are scrambling to secure their military communications from the new threats posed rogue states (think Iran/Russia/North Korea), terrorists (think ISIS), and cyberhackers.
The result is that spending in the global military communications market is rising rapidly, with expected growth from $30 billion in 2018 to over $41 billion by 2027.
Trump & The Defense Sector – A Merger Of Powerful Catalysts
The Trump presidency has so far proven to be an extremely rewarding for defense stock investors. The sector has gained more than 47% in value since his inauguration in January 2017 compared to only 26% for the S&P 500 Index. And this is not a coincidence – because the 2019 defense budget Trump signed authorised $716 billion in defense spending, the highest amount in U.S. history.
On March 11th the 2020 budget proposal was unveiled, with a proposed increase of the defense budget to $750 billion, a further 5% increase and another all-time record.
And that’s not all – because military communications are taking a front seat in this spending boom. The reason for this is pure military logic. According to top experts, China consider’s America’s greatest weakness to be its military communications systems – which would make them a primary target for attack in case of war.
This is why the Pentagon is boosting spending on the communications, electronics, telecommunications, and intelligence (CET&I) technologies segment of its budget faster than any other segment – a 12.3% increase in 2019 spending over the 2018 figure.
In addition, many of America’s top allies, including Israel, Turkey and Saudi Arabia, are also focusing on military communications equipment to counter the threat of ISIS. A $110 billion U.S. defense deal with Saudi Arabia signed in 2017, which could be worth up to $350 billion by 2027, is likely to propel positive sentiment – but is in fact only part of much larger trend.
Analysts are forecasting defense spending in the US to climb to $798 billion by 2022. And the rest of the world is following the same path – with global defense spending jumping by 4.9% in 2018 to $1.78 Trillion, adding to the positive momentum of defense stocks.
When defense stocks move, they move significantly. Uptrends have happened again and again through history, periodically – and they are always driven by government policies:
- Back in the 70s, legendary investor Jim Rogers made a 4,000% return on Lockheed, when the U.S. government starting spending more on electronic warfare systems.
- President Ronald Reagan announced significant increases in the U.S. military budget after his November 1980 election, which led defense stocks to significantly outperform the market in the following 18 months.
- In the 90s, billionaire investor Warren Buffett made more than $3 billion in profits by investing in General Dynamics, as the company refocused its product strategy following the end of the Cold War.
Today, history is about to repeat itself once again – with some niche defense stocks ready to give astute investors triple digit % returns. And TCCO is already rocketing upwards…
TCCO – A textbook case of a stock waiting to move higher
TCCO has already begun to fully reflect a positive industry environment and rising geopolitical tensions. The stock has staged a powerful breakout rally with strong volume starting in March, which saw its share price climb from $2.28 to $5.50 on April 18th – a gain of 141% in barely 6 weeks:
This could just be the beginning…Because, as mentioned before, when defense stocks move up big, they don’t stop after a few weeks: they keep on rising over months and even years.
A chart is worth a thousand words (and opinions) – volumes for TCCO stock literally skyrocketed in April, signaling accumulation of the stock from larger (ie. more sophisticated) investors. The stock is now taking the proverbial “breather”, finding strong price support at 4$ and resting just above its 200-day moving average (a typically bullish sign).
Volume has quietened down, as investors get ready for the next upsurge – which could be very big, as the stock is still far from its 2017 and 2018 highs:
In fact, simply getting back to the December 2017 high of $15 would mean a profit of 275% from the current price.
And there a more than a few reasons why this could come to happen relatively quickly…
TCCO – An Appetising Target For Defense Giants
Dynamic defense companies regularly become appetizing acquisition targets for the sector’s giants. Almost $60 billion was spent in M&A activity in 2018, 83% higher than the 10-year average and the 3rd largest figure in history. More and more often competition between companies in the same defense niche ends up in only two ways – a merger or an acquisition of the smaller company by the larger one.
M & A activity in the defense sector has been however plagued by an ongoing problem – there are too few acquisition targets. Major players are meanwhile limiting their own R&D spending, which means they are forced to buy innovative technologies. Deloitte foresees aggressive acquisitions of companies with niche products to become a major driver of M&A activity.
General Dynamics Corporation (NYSE: GD)
Market Cap: $49 BLN
General Dynamics revenues totaled $10.5 billion in Q3 and $36.2 billion in 2018. The company is a top shipbuilder for the Navy and a top provider of land weapons systems too, building the Abrams tanks, the Stryker family of vehicles, and Light Armored Vehicles. In April 2018 it bought military/government IT security company CSRA for $9.6 billion.
Northrop Grumman Corporation (NYSE: NOC)
Market Cap: $46 BLN
Northrop Grumman’s revenues were $8.2 billion in Q4 2018 and $30.1 billion in 2018. In June 2018 the company purchased Orbital ATK, a producer of rocket propulsion systems, for $9.2 billion.
Raytheon Company (NYSE: RTN)
Market Cap: $50.8 BLN
Raytheon had revenues of $7.4 billion in Q4 and $27.1 billion in 2018. The company builds the Patriot missile defense system along with the interceptors for the Aegis air defense system. It is also the world’s largest producer of guided missiles, among which the Tomahawk cruise missile. Raytheon is also a leader in radar systems and electronic warfare.
Lockheed Martin Corporation (NYSE: LMT)
Market Cap: $83.9 BLN
Lockheed’s revenues were $14.41 billion in Q4 and $53.8 billion in 2018. The company is the world’s largest defense contractor and the producer of F-22 and F-35 fighter jets. Lockheed also produces Sikorsky military and civilian helicopters, as well as a variety of missiles and fire control systems.
HEICO Corporation (NYSE: HEI)
Market Cap: $11.4 BLN
HEICO’s revenues were $0.48 billion in Q4 and $1.78 billion in 2018. The company is a niche player in the aerospace, defense and electronics industries. It is an provider of FAA-approved aircraft replacement parts, aircraft accessories component repair & overhaul services for avionic and electro-mechanical applications. The company is pursuing a growth by acquisition strategy, acquiring 5 companies in the last 12 months alone.
An Undervalued Stock With Strong Upside Potential
Today there are approximately $750 billion invested in defense stocks in the US alone. As TCCO has a market cap of only $7.5 MLN, it would just take a minimal shift in these funds toward TCCO stock to push it higher in relatively little time. This can happen when suddenly investors realise a company’s potential, often after a news release, which can have a major impact on the stock price.
A $2.37 million order from Datron World Communications for TTCO’s DSP 9000 radio encryption equipment in 2016 pushed the stock up 37% in one day. It is important to remember that defense stocks move in cycles – powerful uptrends push prices up a lot in little time. In 2017 alone TCCO shares rose from $2.35 at the start of the year to more than $12.25 by the end of it – a gain of more than 400%.
With a current price of $4.04, a TCCO shareholders stand to multiply their investment by almost four times if TCCO just returns to its 2017 high. This scenario seems more likely when taking into account that TCCO stock appears to be significantly undervalued.
At the end of Q3 2018 the company had $1.98 million in cash and cash equivalents on hand, more than handily covering its total liabilities of $0.5 million. Also, with a book value of $3.6 million and a market cap of $5.6 million, the price/book ratio of the company is only 1.56x compared to 5.75x for the defense sector – a significant discount.
By buying TCCO stock an investor is literally getting the company’s high-tech product line, established customer base, and potentially market-dominating products – almost for free.
TCCO – Positioned To Benefit From Defense Sector Growth and Growing International Tensions
TCCO is well-positioned to benefit from the positive outlook of the defense sector. The advantages are very clear:
- Solid and long-dated connections in the U.S. defense sector since its foundation in 1961 – a fundamental advantage in winning new contracts
- A profitable and growing business, with revenues up 26.1% in 2018
- Excellent brand recognition and clients in 115 countries worldwide
- A very positive macroeconomic environment for the defense sector, both in the U.S. and internationally, and especially for military-grade communications equipment
- A very low fundamental valuation – 1.56x book value, with no ST or LT debt
- An extensive portfolio of over 17 patents for innovative products and ISO 9001 certification since 1995
- The potential of a takeover by a defense company wanting to secure a foothold in the military-grade communications niche
- A fantastic technical set-up – breaking new 12-month highs on very strong volume, but still more than a 200% move away from its highs of 2018
- An unpredictable and increasingly dangerous number of geopolitical conflicts – a huge upside catalyst for US and global defense budgets in the long-term
TCCO is well-positioned to ride the trend of defense industry consolidation, defense budget increases, and greater international emphasis on communications security. It’s a large global sales footprint, combined with a solid financial position and wide product range, contribute to making it both a viable investment as a standalone entity or as an M&A target.
At the same time, the defense sector is increasingly becoming a major focus point for investors. A barrage of geopolitical conflicts are showing up almost on a daily basis – from tensions with the Russians over Venezuela and potential new sanctions on Cuba, to what seems like a brewing trade war with China. Meanwhile, the US is already sending its B-52 bombers to the Gulf in view of a potentially imminent attack by Iran on US naval forces.
TCCO’s brief price pause looks like the perfect place to enter a position in the stock – and nobody knows how long this might last. Just a return to its recent April high would give you a quick 35% profit.
If global tensions do not subside (and there is no evidence that they are doing so), and you are willing to invest over the next months, prepare yourself to see TCCO go higher than expected – and maybe even take out convincingly its 2017 high of $15.60. Savvy investors should consider locking in the current price as an excellent opportunity to profit from one of world’s most promising sectors, at a perfect time.