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When Herley Industries (HRLY
) reports its fiscal first-quarter results today at the market's 4 p.m. close, initial investor reaction may well be negative: Street expectations are for earnings to come in at 35 cents a share, off from last year's 38 cents. And investment manager Steve Bruno of Dalton, Greiner, Hartman, Maher & Co., expects an even lower figure of 30 cents.
But don't expect Bruno to turn negative on the stock. He has, in fact, been buying more shares. The reason: He believes that the downturn in earnings is due mainly to a 20% rise in shares outstanding resulting from the exercise of warrants last year. Bruno has other reasons for staying very bullish on Herley, a provider of command-and-control and flight-instrumentation systems for the aerospace and defense industry. "The company has a leading, solid position in the defense industry and satellite-launch business where operating margins are high," says Bruno.
And equally significant, he adds, Herley has gone into the commercial wireless communications business, which has yet to be reflected in its stock price. Strong cash flow from the defense operations is internally funding the new venture, Herley Wireless.
A RUSH OF DATA. In effect, says Bruno, at the stock's current price of 21, "you are getting for free Herley's wireless business, which is expected to add substantially to the company's sales and bottom line." One of the wireless unit's major products is a lithium-niabate device used in fiber-optic assemblies for communications systems. The patented device is capable of transmitting data at 40 gigabyte per second, or 20 times the current rate. Herley is currently looking for strategic partners for this product.
The wireless division is also developing noise-cancellation equipment that allows operators to amplify cleaner signals over long distances. Already, Herley shares have been a big winner this year, up 41% in spite of the general market's sharp downturn.
Bruno figures that with the company's strong sales and earnings growth in its core defense and aerospace business -- and the big potential contribution from its new wireless operations -- the stock could easily hit 35 within 12 months.
"UPSIDE" STORY. Other analysts are equally optimistic about Herley's new wireless business. "Herley Wireless is the upside to the company's story," says Mitchell Pinheiro of Janney Montgomery Scott, who rates the stock a buy. He figures wireless will contribute sales of about $12 million this year, excluding incremental gains from recent acquisitions. Including those purchases, namely Terrasat Inc. and American Microwave Technology, the wireless unit alone could generate sales of $16 million, estimates Pinheiro.
Herley's defense business focuses largely on electronic warfare systems, including radar and defense equipment. The company also manufactures products for the commercial space-launch industry, including equipment for unmanned vehicles used in reconnaissance, mapping, and training targets.
With its recent acquisitons, Herley will be diversifying into new products, including power amplifiers for the medical and scientific communities, notes Pinheiro. And at its Terrasat unit, the company will be producing microwave assemblies for digital radios.
Bruno of Dalton Greiner expects Herley to beat analysts' earnings forecasts for fiscal 2001, ending July 31, of $1.50 a share, and $1.70 for fiscal 2002. Bruno figures Herley will earn $1.55 in fiscal 2001 and $1.90 in 2002.
For a little-known stock in the long-neglected defense sector, says Bruno, "Herley has all the promise of becoming a big winner for us."
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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