Clarus trumpets DragonWave

Always a sucker for a good headline, here is a recent research note from Clarus Securities. They make some sensible points about DragonWave (DWI:TSX):

“Don’t Throw The Baby Out With The Bath Water!

HIGHLIGHTS

1. Recent Sell-Off in DWI Stock Appears Overdone

We believe investor sentiment has been overly depressed by a) the delay/risk in a renewed Sprint-Clearwire JV and b) misplaced association with other Canadian small cap tech stocks such as Sandvine (see prior post “Sandvine gets taken out and shot” March 7-08) and Redline ( see prior post “Redline Communications a classic tale” March 3-08) who have had high profile disappointments.

2. Strong Growth Opportunity Outside Sprint / Clearwire

Our confidence in the growth and diversification of DWI’s international business is reinforced. Large customers such as Televersa in Europe and Orascom in the EMEA region present ongoing opportunity. Management has indicated that DWI is currently in, or about to begin four trials
outside North America with brand new customers, all operators of significant size.

3. Even With Zero Contribution from Sprint and Clearwire, Our Target Price would be $5.30

This is based on 15x C2009 EPS. Using current comp average multiple of 10x (which we believe is fundamentally undervalued today due to extraneous credit market concerns), at worst our target is $3.35.

4. An Extremely Attractive Entry at Today’s Price

Investors should look at taking a position in DragonWave. Over half the value of the stock is now cash ($1.38 per share). Ex-cash the stock is trading at 2.75x our C2009 EPS (adjusted for interest).

Conclusion and Recommendation

We believe DragonWave will continue to grow outside of North America. Should Sprint and Clearwire re-engage, as we anticipate they will, the upside to the share price is enormous. We reiterate our BUY recommendation and 12-month target price of $6.50 per share.”

MRM