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Warfare's Future: Under the Radar

BOSTON ( TheStreet) -- Cubic Corp. (CUB - Get Report) is a defense company with a twist.

The San Diego-based company divides its operations into three units: transportation systems, defense systems and mission-support services. Transportation systems, which posted $303 million in annual sales and is a leading global provider of automated fare collection systems, provides necessary diversification from military contracts.

The transportation business also enjoys the highest operating margin of the three units. In 2009, it amassed $44 million of operating profit, which translates to a profit spread of 16%. Defense systems and mission-support systems notched operating margins around 7%. Management projects a doubling of revenue over the next 10 years and expects new contracts with municipal transit authorities, which will feel pressure to outsource services to more-efficient vendors as state budget deficits soar.

Cubic's fiscal fourth-quarter profit soared 54% to $12 million, or 46 cents a share, as revenue climbed 19% to $281 million. Its net margin, unchanged at 4%, lags behind those of large-cap peers like United Technologies (UTX - Get Report) and Lockheed Martin (LMT - Get Report). But Cubic has redeeming features, namely its balance sheet. The company holds $253 million of cash and just $25 million of debt.

The cash balance more than doubled since the year-earlier quarter as the company's debt load lessened by 21%. In addition, Cubic is a comparatively cheap stock. The shares are cheaper than the aerospace and defense peer group based on trailing earnings, projected earnings, book value and cash flow per share. However, its PEG ratio, a measure of value relative to growth expectations, is high at 1.4. By comparison, the industry average is 0.9. On that basis, the stock is expensive when considering analysts' expectations.

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