xG Technology (XGTI) Rises with Subcontract to US Army; Why Should You Sell?

June 24, 2014 • Top News • Tags:

xG Technology is up over 35% in morning trading as the company announced it has been awarded a subcontract position to provide communications and networking services to US Army. Sounds promising right? Well, first of all, the contract has a ceiling value of $497M and second, xG is only a subcontractor. Science Appliations International Corporations “SAIC” (SAIC) is the prime contractor. SAIC stock is unaffected by this news.

xG is only going to receive a portion of the $497M contract. How much is the question. Since SAIC is primary contractor, most of the revenue will be recognized by them. xG will provide research, development and evaluation in support of communications and networks systems including antennas, system engineering, satellite communication, cybersecurity, and communications networks.

Analyzing market reaction, xG added about $17M in market cap value. This would be equivalent to ~3% of the full $497M contract. Keep in mind; this is assuming markets are efficient, which is rarely the case.

xgti value added

 

The above calculations are very sensitive to assumptions and disregard the length of the contract. The US Army’s contract is a five-year period of performance (36 month base and two 12 month options). Thus, discounting for present value would make the $12M figure above even less.

Even the optimistic assumptions made above do not justify xG’s move today. What supports this notion even more is that SAIC stock remains unaffected by this news. Sell before the inevitable drop.

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