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A Dirt Cheap Tech Stock

Wireless Facilities is cheap. Does it deserve to be?

The wireless network outsourcing firm trades at a price-to-earnings ratio of 18 - a full third cheaper than the S&P 500 - and a price-to-sales ratio of 1.1. With most technology stocks trading at PEs greater than 30, WFII is priced like an industrial stock.

On the surface, WFII doesn't appear to be any different than any other tech stock suffering through the spending slowdown. Earnings are expected to decline 56% this year, to 33 cents a share. But that's a lot of earnings for a $6 stock. Most tech stocks down in the mid-single digits are there because they're losing money, and that includes blue-chip names like Lucent and Nortel .

And based on 2002 estimates of 67 cents a share, Wireless Facilities trades at a forward PE of just under 9, 33% cheaper than General Motors .

The company's list of customers include AT&T, Verizon, Cingular and Nextel, among others. Not a group that's likely to go out of business.

But WFII also has exposure to troubled firms like Metricom , which filed for bankruptcy protection recently. Wireless Facilities will take a $13.6 million charge this quarter to cover the Metricom bankruptcy. That's a big hit for a company with a $268 million market cap.

And Wireless Facilities missed estimates in its most recent quarter with a 7-cent loss, versus estimates of a 5-cent loss, and guided future results lower. That loss, the write down, and single-digit earnings estimates for the rest of the year give the company's fundamental business little room for error.

Investors can't seem to make up their minds whether the stock should be cheaper or more expensive. The stock has spent the last couple of months in one big indecision triangle (see chart below). A break above 7.40 or below 5.50 could be worth about three points, a big percentage move in a stock priced at these levels. The one negative in that chart is that ADX, an indicator of trend strength, turned up when the stock turned down recently. That's a problem that a lot of tech stocks have been having here: the strongest trends still appear to be down.

Wireless Facilities seems to be substantially undervalued compared to its peers. The problem is that the company needs to execute to prove it.