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Little-known satellite parts producer Com Dev poised to take off

An Orbital Sciences satellite: Com Dev supplies most of the world’s commercial communications satellites.

Orbital Sciences Corporation

Glance at the shareholder list of Com Dev International Ltd., and the two largest positions jump out at you: I.A. Michael Investment Counsel Ltd. and Beutel, Goodman & Company Ltd., two Bay Street players noted for being savvy practitioners of the art of value investing.

Together, the firms own just slightly more than a fifth of Com Dev, a maker of parts for satellites. More than 80 per cent of the 700 commercial communications satellites ever launched contain Com Dev equipment, not bad for a company that isn't as well known as its famous Canadian rival, MacDonald Dettwiler and Associates Ltd., which has always basked in the reflected glory of the space arm it made for the U.S. space shuttle.

But little-known Com Dev may be an underappreciated investment prospect, with plenty of upside left despite a recent great run.

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That's the contention of Irwin Michael, president of his eponymous firm, with whom we recently chatted about the prospects for Com Dev, which he characterized as an "undiscovered little gem" and a possible takeover candidate to boot.

"As deep value investors we rarely get the opportunity to buy a high-technology stock, so we're not in a rush to sell it because we think at some point the company could be put in play," he says.

Both Com Dev and MDA have been on a tear, up about 70 per cent and 40 per cent respectively over the past year.

Mr. Michael says Com Dev would be a great fit for countless companies and has a price target of $5 a share, compared to recent trading around $3.25.

Given that the market capitalization is currently only around $250-million, the amount "is a rounding error for a big U.S. company" looking to expand its high-technology offerings, he says.

As a business, satellite making has decent underlying fundamentals. The ever increasing demand for broadband, high-definition TV and mobile communications underpins demand for more new civilian satellites, the company's main line of business. Once launched, space isn't that friendly a place for all the sensitive high-tech gear orbiting the earth. Satellites typically function for only about 12 to 15 years, so older ones are always in need of replacement, another plus.

Mr. Michael started buying Com Dev several years ago at about $3 a share, and it promptly tumbled, falling all the way down to about $1.60 in 2011. He continued buying all the way down, convinced it was a value stock and was becoming an even better deal at lower prices, although it was a bit gut wrenching at times. "It was pretty ugly" on the way down, he says.

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Analysts are cottoning onto the company's improving prospects, although they're nowhere near as bullish as Mr. Michael. Last month, CIBC raised its target to $4 from $3.50. National Bank Financial, which had a target of only $2, did a bit of catch up to the recent rise and upped it to $3.50. The firm upgraded its rating to "sector perform" from "underperform" after Com Dev issued optimistic revenue growth for this fiscal year.

As in any value play, there has to be a catalyst to get the stock rolling, and Com Dev has several.

Com Dev faltered from 2010 through much of 2012 because it signed five fixed-price contracts that ended up facing substantial cost escalation. The impact of those contracts is now behind the company, and new management with a focus on more disciplined pricing has been put in place.

National Bank had pegged revenue growth at only 3 per cent, but was surprised when management said after releasing its most recent quarterly figures that it expects 8 to 10 per cent this year.

A sleeper for Com Dev could be something a little more down to earth. Most major ships regularly transmit data on their location, course and speed to other vessels around them. Com Dev has figured out a way to detect these signals from space, and is offering to sell the information through a majority owned subsidiary, exactEarth.

Just who might be interested? Com Dev figures governments will want to know who is approaching their coasts, for environmental, search and rescue and security reasons. It told shareholders in a report that it will be a "high margin, recurring revenue business."

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Mr. Michael said the exactEarth operation on its own "could be worth a couple of dollars in valuation" once investors have a better appreciation for the revenue stream.

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