Friday, November 16, 2012

Applied Signal, Mercury Computer Rise After Boeing/Argon Deal

Today’s news that Boeing (BA) is acquiring Argon ST (STST), a defense electronics company, for $775 million has triggered some speculative action in shares of Argon’s rivals.

Merriman Curhan Ford analyst James McIlree pointed out in a research note that the two companies most comparable to Argon are Applied Signal Technology (APSG) and Mercury Computer Systems (MRCY), and shares of both companies are trading sharply higher.

“Argon makes a variety of signals intelligence, sensors, electronic warfare and sonar as well as other C4ISR” – DOD speak for “Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance” – “products and services for the U.S. and international military markets. In our group we believe it is most comparable to Applied Signal and Mercury.”

He notes that Argon is being acquired for 13x EBITDA; as of yesterday’s close, Applied was at 7.1x forward 12 months EBITDA, with Mercury at 6.5x

“M&A is common in the space, but more so in times when the top-line is pressured,” he writes. “For the large companies, working capital needs decline, mix becomes richer and cash flow grows far beyond internal needs. Acquisitions are used to bolster growth and find a productive use for the cash. The multiples of smaller companies benefit from the higher relative growth as platforms are upgraded and from the acquisition support.” The stocks in the group are cheap, he contends, and fundamentals are improving.

In today’s trading:

  • Argon is up $9.91, or 40.6%, to $34.34.
  • APSG is up $1.50, or 8.2%, to $19.70.
  • MRCY is up 88 cents, or 8%, to $11.88.

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