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Contributors: Douglas McIntyre Jon C. Ogg

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Wednesday, August 23, 2006

Government Spying Concerns Causes Earnings Miss (Applied Signal Tech)

A classic earnings miss is hurting shareholders in Applied Signal Technology, Inc. (APSG) this morning. The first thing to note is that with all the heat the government was taking on international cell phone snooping and "maybe domestic" cell phone and landline snooping (nod, nod, wink, wink), this earnings miss is probably not that surprising at all. It also hasn't helped that a recent ruling went against the government on this initiative and the current election is making this part of a larger ongoing issue.

The company engages in the design, development, manufacture, and marketing of advanced digital signal processing products, systems, and services in support of intelligence, surveillance, and reconnaissance primarily to the United States Government for global security. In short, they sell spook-ware to the government.

The company posted a mere $0.08 EPS versus estimates of $0.18 and versus last year's $0.15. Revenues were $39.5 million, up from last year's $36.3 million but down from the $45+ million.
Ryan Beck's analyst is actually lightly defending the shares this morning on weakness because of sensitivity to individual orders and because the company should be viewed in a smoothing-out manner. Friedman, Billings, Ramsay downgraded the shares to a Market Perform from an Outperform rating. CE Unterberg Towbin also downgraded APSG to a Market Perform from an Buy rating.

APSG is trading down 16%, or down $2.52, at $13.11 after last nights warning. Perhaps an issue to note here is that IF this really does get perceived as a "value" it could become an acquisition target for one of the defense and homeland security companies. L-3 (LLL) would have been a shoe-in potential buyer, but now that the CEO passed away the company is sort of in lock-down mode and may be on the block itself. With a market cap of under $184 million, it would be an easy integration for any larger company as long as it wouldn't be a situation the government objected to. This has not yet been added to the BAIT SHOP as a takeover candidate, but this last drop may accelerate its status off the watch list as it would be an easy integration for a larger outside defense or homeland security-oriented company.

Like it or not, governments spy. Like it or not, our world isn't going to be changing any time soon where the government feels it doesn't need to spy. Like it or not, this company isn't going to stop getting spy-tech orders. Like it or not, Applied Signal isn't going away any time soon.

Jon C. Ogg
August 22, 2006

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