Mitel is “one to sock away”, says Cormark analyst Tse

Mitel CEO Rich McBee. Mitel’s (TSX:MNW) second quarter results and third quarter guidance were a mixed bag, but the current pullback in the stock is an excellent opportunity for investors with a longer-term focus, says Cormark analyst Richard Tse.

Yesterday, Mitel reported its Q2, 2014 results. The company earned $800,000 on revenue of o $288.7-million, up 97% from last year’s second quarter, primarily because of the massive acquisition of hometown peer Aastra (All numbers in U.S. figures).

CEO Rich McBee was upbeat about the results.

“Mitel emerged from the second quarter with record reported quarterly revenue and global market momentum that enabled us to beat consensus and deliver consistently strong financial results through the first half of the year,” he said. “The expanded global Mitel team demonstrated an outstanding ability to address immediate customer needs, and, at the same time, maintain tight focus on the execution of our long-term strategy to invest in the cloud, expand our contact centre business, and leverage our installed base of 60 million end-customers worldwide.”

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Tse says Mitel’s pullback is related not to its essentially in-line Q2, but to its guidance for Q3, in which the company says revenue is expected to be in the range of $261-million to $276-million, due to “typical third quarter seasonality”. The analyst says there is a “misperception on the timing of synergies” related to the integration of Aastra, (perhaps due to a better than expected Q1) and he believes that most of those synergies are yet to come. He notes that the company has incurred just over $24-million of the $83-million in integration costs in the first half of 2014. Tse thinks the company’s EBITDA run rate, post integration will be in excess of $200-million.

The bottom line for Tse is that he thinks Mitel’s integration of Aastra is on track and he sees overlooked value in the company’s expanding cloud business, which he believes is set to benefit from an upgrade cycle in enterprise communications. Add to that the potential for a “meaningfully accretive acquisition” over the next one or two years, and the result is a stock that is undervalued, argues the analyst.

In a research update to clients today, Tse reiterated his “Top Pick” rating and (U.S.) $16.00 one-year target on Mitel.