Aviat Networks Shares: Growth Outlook Disappoints But Too Cheap To Ignore Buy (AVNW)

notice:

I mentioned Aviat Networks, Inc. (NASDAQ: AVNW) beforehand, so buyers ought to view this as an replace to mine earlier protection of the corporate.

Final month, main supplier of wi-fi transport and entry options Aviat Networks, Inc. or “Aviat Networks” reported combined Q3/FY24 outcomes with a slight drop in income however profitability effectively forward consensus expectations:

​​​​​​Whereas profitability was impacted by the latest acquisition of Pasolink, favorable working capital actions generated robust money circulation:

In keeping with administration’s assertion on the convention name, Pasolink’s enterprise was practically break-even on an EBITDA foundation within the quarter and expanded to generate free money circulation:

Nevertheless, Pasolink’s enterprise progress will likely be slower than anticipated:

As we now have added Pasolink prospects, we now have reviewed buyer profitability guarantee a sustainable margin stage. Though nonetheless a piece in progress, we anticipate this to result in a slower build-up to the goal annual fee of $140 million.

As well as, Aviat is going through foreign money headwinds in its African cell enterprise and is experiencing extra cautious spending tendencies from tier one prospects.

Consequently, administration lowered its fiscal 2024 income steerage, whereas preserving its adjusted EBITDA steerage unchanged:

In the course of the convention name, administration additionally deviated from its earlier fiscal 2025 income steerage of $515 million to $520 million offered in the course of the 2Q2024 convention name.

(…) we acquired a bit too passionate about our FY25 numbers. We normally put that within the August session, and I feel we — we’re not going to exceed that steerage in August. And I’d say the $515 million quantity would in all probability be the decrease finish of the vary, however we’re not able to go there. And we discovered some “empty income” in Pasolink, so we’re not going to take that.

On the optimistic aspect, the Pasolink acquisition is reported to be forward of schedule by way of EBITDA and free money circulation, and administration continues to anticipate accretive earnings per share by 2Q2025.

Unsurprisingly, market individuals had been disenchanted by the corporate’s downgrade in progress forecasts, resulting in an preliminary 16% sell-off in shares:

Nevertheless, the share worth has stabilized in latest weeks as Aviat Networks stays low cost from a basic perspective. Beneath a conservative assumption of FY2025 adjusted EBITDA of $60 million, the corporate’s EV/EBITDA ratio of 6x can be effectively under the broader US telecom gear business.

Assigning a extra affordable a number of of 10x would give a $50 worth goal for the inventory, offering greater than 60% upside from present ranges.

Due to this fact, I reiterate my Purchase ranking with an unchanged worth goal of $50.

Backside line

Aviat Networks reported combined outcomes for Q3/FY2024 and lowered its progress forecasts, primarily as a result of income from its latest acquisition of Pasolink isn’t rising as quick as anticipated.

Nevertheless, Pasolink seems to be forward of schedule by way of profitability and money era, with earnings per share accretion anticipated in Q2 FY25.

Whereas the corporate’s decrease progress is disappointing, the difficulty is greater than mirrored in Aviat Networks’ considerably decreased valuation relative to the broader US telecommunications business.

As such, I reiterate my Purchase ranking on the inventory with an unchanged $50 worth goal.