In a research report to clients this morning, Cantor Fitzgerald analyst Tom Liston initiated coverage of Redline Communications (TSX:RDL) with a BUY rating and $7.50 one-year target.
Cantor’s rating punctuates the turnaround of a company that many left for dead. In 2009 CEO Eric Melka, who joined Redline from Telemedia Ventures has presided over a near clean sweep of the its business, management team, and board.
The company was resuscitated after a disastrous bet on Wi-MAX, a wireless communications standard that was ultimately beaten out by LTE.
Melka refocused Redline on a return to its roots in providing broadband wireless equipment to niche markets. By developing what he calls a “software driven hardware platform” and stopping all Wi-MAX development, Redline instantly reversed its fortunes, turning a loss of $10-million in 2009 to a profit of $4-million the very next year.
Liston says Redline is winning business because its offerings are differentiated from its competitors. He says the company delivers a lower cost of ownership over other technologies, particularly in the oil & gas and public security verticals, where it has had several recent wins.
He also says the company’s flirtation with extinction has an unexpected silver lining; Redline has significant tax losses which will shelter near term profits. At the end of last year, he points out the company had net operating loss carry forwards of $46.8 million, a loss that will be able to reduce taxable income in future year.
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The Cantor Fitzgerald analyst says Redline is showing signs of future growth in that its order backlog has grown substantially in the past two quarters; from $6.5-million in Q1, to $16.1-million in Q3. He says each $5 million contract adds an incremental EPS of $0.10-0.15. His target is based on 13x 2014 adjusted EPS, which he thinks will come in at $.56.