May 12th, 2011

Anaren
ANEN/NASDAQ

Investment Rating: Buy

Price: $14.94 S&P 500: 1030.71 DJIA: 9774.02 Russell 2000: 609.49
• Wireless Communication group benefits from 4G network roll out
• Strong Balance Sheet offers potential for expansion
• Future Defense budget cuts pose threat to Space & Defense Group
• Our 12 month target price is $26.11 at June 30, 2010

Valuation: 2010 E :
DCF $28.87
RE $19.50
AEG $39.34
Comparable Firms Analysis $16.71

Market Capitalization: Stock Data:
Equity Market Cap: $219,543,300 52-week Range: 13.11-22.67
Enterprise Value: $219,543,300 12-month Stock Performance:15.38%
Shares Outstanding: 14,695,000 Dividend Yield: 0
Estimated Float: 13.88M Book Value Per Share: $11.77
Avg Vol (3M): 59,232 Beta: 1.12

Company Overview:
Location: East Syracuse, NY
Industry: Aerospace, Defense and Wireless Industry
Description: Anaren designs, develops and manufactures microwave and radio
frequency components,assemblies and subsystems that receive, process and trans-
mit radar and other signals.
Key Products and Services: Anaren supplies microwave components and assem-
blies for the wireless market, along with the space and defense markets.
Company Website: www.anaren.com

Analysts: Investment Research Manager:

Michelle Firoozan Professor Dina Naples-Layish, PhD
Qing Fang Dawei Wu
Ian Douglas Lawrence
Nicholas Lauzze
Kai Liu
Raul Reyes

The Anaren Equity Analyst report is produced solely as a part of an educational program of Binghamton
University’s School of Management. The reports are not investment advice and you should not and may
not rely on them in making any investment decision. You should consult an investment professional and/or
conduct your own primary research regarding any potential investment.
 Anaren, Inc. Equity Research Report May 6, 2011

Figure 1: 5-year Stock Performance, 6/30/2006 - 6/30/2011

Price
Performance

Source: google.com/finance

We give Anaren (NASDAQ: ANEN) a “Buy” rating based on our target price of
Investment summary $26.11, which is higher than the market price of $14.94 at the end of the fiscal
year 2010, ending on June 30th. We utilized the discount cash flow model, the
comparable firms’ analysis, the residual earnings model, and the abnormal earn-
ings model to arrive at our target price. We also considered in our evaluation of
Anaren the acquisition of MSKennedy in 2008, the future potential EPS growth,
and Anaren’s growth strategy of developing new technologies and expanding
lines of production through acquisitions of already established firms.

Anaren is a radio frequency and microwave component supplier headquartered

in East Syrcause, NY. The company designs, develops and manufactures compo-
nents, assemblies and subsystemsfor wireless communication systems, including
infrastructure, consumer, medical applications, advanced radar, beam-forming,
jamming, motion control and receiver applications. Anaren hopes to grow
through the process of acquisitions and by introducing new product lines to the
market. Anaren is committed to acting as a third-tier supplier and is dedicating
its resources to expand its productions and market globally. Currently, Anaren
currently has sites in Suzhou (China), Littleton (Colorado), Salem (New Hamp-
shire), and in East Syracuse and Liverpool (New York). Anaren is consistently
pursuing new contracts in the realm of consumer wireless technologies in order
to slowly re-focus their attention away from the declining US defense budget.

We analyzed Anaren based on fundamental analysis. Values found in both the

2010 10-K and the current market value were utilized throughout our research.
We anchored our valuation methods based on these concrete values to reduce the
subjectivity in valuing Anaren. Assumptions are clearly stated to support the rea-
soning made for each valuation. Economic factors (such as the 30-Year Treasury
Bond, the inflationary rate, the market premium) were also utilized in our valu-
ation. Anaren is composed of 83.7% equity and 16.3% of debt. Anaren chooses
not to leverage its capital, as it currently has no publicly traded debt. Anaren has
never issued dividends, nor does it plan to, since the Company chooses to rein-
vest the dividends to create value for shareholders by improving and expanding
their lines of production.

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 Anaren, Inc. Equity Research Report May 6, 2011

Valuation In arriving at the target price of $26.11, we used the discounted cash flows, resid-
ual earnings, abnormal earnings growth, and comparable firms analysis methods
to evaluate Anaren’s intrinsic value at June 30, 2010. The discounted cash flows
method takes into account all of the future projections made about operating,
investing, and financing activities, based on the assumption that the future free
cash flows after 2010 will continue growing at the expected inflation of 3%. The
residual earnings model measures the added value in excess of the book value of
shareholders’ equity from investment decisions, assuming that the earnings per
share will grow at 21% for the next 5 years and the residual earnings will grow
at 3% thereafter. Abnormal earnings growth model indicates the earnings growth
over the required growth rate for the next 5 years and assume that the abnormal
earnings growth will continue to increase at 3% after 2015. The comparable firm
analysis uses firms within the same industry to dervie Anaren’s intrinsiv stock
price based upon the valuation of key ratios.

Figure 2: Valuation Method Results

Source: Authors

The DCF method is used to estimate the attractiveness of an investment oppor-

Discounted Cash Flow tunity by valuing the PV of its future cash flows. In this analysis, we used future
cash flows projections of Anaren and discounted them using a weighted average
cost of capital (WACC value of 9.29%) to arrive at a present value. The present
value of this calculation is $28.87, which is also the target price per share that we
arrived at using the DCF method. The target price is higher than the current price
$14.94, indicating a “Buy” recommendation.

The residual earnings model attempts to measure the added value in excess of
Residual Earnings book value. The firm’s required return is used as the basis for calculating ex-
cess value over the book value of shareholders’ equity. The intrinsic price per
share for Anaren utilizing our model is $19.50 as of June 30, 2010. Based on the
values we obtained from our analysis, we would recommend a “Buy” because
the intrinsic price per share computed ($19.50) is higher than the price per share
traded on the market ($14.94).

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 Anaren, Inc. Equity Research Report May 6, 2011

Abnormal Earnings Growth
The abnormal earnings growth (AEG) is the measure of earnings growth in
excess of growth at a rate equal to the required return. The model measures the
cum-dividend earnings growth over normal earnings, or the abnormal earnings
growth. The intrinsic value using this model was $39.34. Based on the values we
obtained from our analysis, we recommend a “Buy” because the intrinsic price
per share computed ($39.34) was higher than the price per share traded on the
market ($14.94).

Comparable Firms The comparable firms method compares the key operating metrics of other firms
within the same peer group as Anaren. The peers chosen had an industry focus
similar to Anaren and a company size similar to Anaren. This valuation tech-
nique fails to utilize firms that are in the exact industry focus as Anaren, being
that many firms have multiple lines of focus and operations outside of Anaren’s
main focus. Other factors that were taken into account in this valuation were the
varying the company sizes in comparison to Anaren’s market capitalization. This
method yielded a value of $16.71 per share using a simple average, indicating a
“Buy”.

Anaren has the ability to leverage its strengths in the wireless communications
Investment industry to capitalize on an ever changing technological environment. Net Sales
Thesis for the Wireless Group for the third quarter were $15.2 million. The increase in
net sales was attributable to the increase in demand for standard components for
infrastructure and consumer applications.

Capitalized on Growth in
Wireless Communications
Sector
There has been an industry shift during the third quarter in 2011 to 4G base sta-
tion applications, allowing Anaren to develop new products to capitalize on this
industry wide change. This shift to 4G has had a positive impact on Anaren’s net
sales, but resulted in lower margins because the related 4G technology has lower
yields. Over time, Anaren expects demand for this new technology to increase
and contribute to wider margins and greater profitability.

Threats due to cuts in U.S.
fiscal defense budget
Anaren risks revenue loss from Department of Defense budget reductions in the
future. The fiscal 2011 defense budget is $513 billion. The fiscal 2012 budget
request is for an increase to $553 billion. The defense department has stated
that it looks to cut the defense budget by a cumulative $400 billion by 2023,
representing a $33 billion dollar reduction every year. This poses a threat to
Anaren’s future sales because the Space & Defense group is heavily reliant on
these contracts. Even in the face of budget cuts, the order backlog for the Space
& Defense group is $88 million. Although Anaren is threatened by fiscal budget
cuts, it can leverage its international client base and broad product offerings to
capitalize on this global and ever changing marketplace.

Leveraged strong balance
sheet to gain international
recognition
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Anaren’s cash balance increased from $49.89 million in 2008 to $50.52 mil-
lion. The use of a revolving credit facility gives Anaren the unique opportunity
to grow and expand into new markets. As Anaren becomes more internationally
recognized in the wireless communication sector and the defense industry, it
will have greater access to cheaper financing to finance future projects. Taking
on more debt would give Anaren the ability to enter into other markets such as
wireless data transmission, mobile handsets, bluetooth, and satellite television.
These markets offer large scale growth and would offer Anaren a more diversi-
fied product base.
 Anaren, Inc. Equity Research Report May 6, 2011

Industry Analysis In recent years, a variety of changing conditions have significantly affected the
markets for defense systems, products and services. The U.S. defense budget
expects a slower continued growth through 2011, and could either slow or flatten
over the next few years. Defense industry priorities are changing from a threat-
based model to a capabilities-based one to meet national and homeland security
requirements, which align well with Anaren’s expertise and core competencies.

The U.S. Department of Defense (DoD) budgets have reflected an increased

focus on meeting the capabilities-based model by purchasing products involving
command, control, communications, computers, collaboration and intelligence,
surveillance and reconnaissance (C5ISR), Unmanned Aerial Vehicles (UAVs)
and other electro-mechanical robotic capabilities, networked information tech-
nologies, and missile defense systems. Anaren is favorably impacted by this refo-
cus, as their components and subassemblies are used in a wide variety of military
and consumer products within the wireless, aerospace, and defense industry.

The following comparable firms were chosen based on market capitalization and
Peer
positive earnings for the present year. These firms are referred to in the equity
Analysis calculations found in the later part of this report to analyze Anaren to the Aero-
space, Defense and Wireless Industries.

EMS Technologies (ELMG) Wireless communications systems provider serving the markets for satellite com-
munications, radar, and other specialized applications.

Telephone & Data Systems Inc. A diversified telecommunications company operating primarily in the cellular,
(TDS) local telephone, and personal communications services markets.

United States Cellular Cellular telephone services provider throughout the United States.
Corporate (USM)

A wireless communications provider in the United States offering unlimited

MetroPCS Communications, wireless voice and data services to the mass market.
Inc. (PCS)

A two-way wireless Internet messaging and wireless information service provid-

USA Mobility, Inc. (USMO) er that operates offices and stores across the United States and in the Caribbean.

A varied telecommunications company operating primarily in the cellular, local

NTELOS Holdings Corp. telephone, and personal communications services markets throughout the United
(NTLS) States.

Tandem interconnection services provider to competitive carriers, including

Neutral Tandem, Inc. (TNDM) wireless, wireline, cable telephony and Voice over Internet Protocol companies.

InterDigital, Inc. (IDCC) Advanced digital wireless telecommunications developer for technology ap-
plications that offers time division multiple access and wide band code division
multiple access proprietary and standards.

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 Anaren, Inc. Equity Research Report May 6, 2011

Anaren (NASDAQ:ANEN) designs, develops and manufactures microwave and

Company
radio frequency components, assemblies and subsystems that receive, process
Description and transmit radar and other signals.

The Company supplies microwave components and assemblies for the Wireless
market, along with the Space & Defense electronics markets. The Company’s
components and subsystems are used for wireless communication systems,
including infrastructure, consumer, medical applications, advanced radar, beam-
forming, jamming, motion control and receiver applications.

Anaren components and subsystems perpetuate, manage, or manipulate RF and

Current microwave signals, and is incorporated into many technology products, from cell
Products phones, to W-LAN hubs, to fighter-jet jammers, to base-station amplifiers, and to
satellite beamforming systems.

Anaren consists of two separate business sectors, which include the Wireless
Communications Group and the Space & Defense Group. The Wireless Group
Business and Space & Defense Groups design, manufacture, and market commercial prod-
Segments ucts used mainly by the wireless communications market and the Aerospace and
Defense electronics markets respectively.

Exhibit 3: Anaren Geographical Locations

Geographical
Presence

Source: maps.google.com retrieved on April 23, 2011

The Company’s Space & Defense Group focuses on prime space and defense
contractors:
• Anaren Microwave, Inc. (East Syracuse, New York)
• Anaren Ceramics, Inc. (Salem, New Hampshire)
• MS Kennedy Corp. Subsidiary (Liverpool, New York)
• Unicircuit, Inc. (Littleton, Colorado)

Anaren’s Wireless Group concentrates on wireless infrastructure and consumer

electronics in the following locations:
• Anaren Microwave, Inc. (East Syracuse, New York)
• Anaren Communications (Suzhou, China)

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 Anaren, Inc. Equity Research Report May 6, 2011

Future Key Components of Anaren’s Future Strategy include the following plans, while
Strategy primarily focusing on the development of new products and technology to ex-
pand the Company’s standard component product portfolio:

Pursuing Large Expanding its product line breadth to follow its success in the mobile wireless
Addressable Markets market to include Wireless Data Transmission, Mobile Handsets, Bluetooth, Sat-
ellite Television, medical and other consumer electronics markets.

Focusing on value added Developing the component offerings of its products in order to increase the use
products of each wireless application.

Strengthening Strengthening and expanding customer relationships, including developing its

Customer relationships customer base with the few large OEMs that drive the wireless market, including
Alcatel Lucent, Ericsson, Huawei, Motorola, Nokia Siemens Networks, ZTE and
Samsung.

Pursuing a cost Making use of its technological superiority, low cost manufacturing, and sourc-
leadership position ing capabilities as a means to achieve the ultimate goal of being one of the
lowest cost providers of defense components and higher-level assemblies for the
wireless markets.

Strategic Acquisitions Pursuing strategic acquisitions and maintaining its strategy of making use of op-
portunistic acquisitions of companies, product lines and technologies.

The board of directors and the executive officers of Anaren have sufficient
Management
experience in the technology sectors to properly manage the operations of the
Performance company. The board of directors is comprised of 9 individuals who are respon-
and sible for selecting their own members to be on the board and for delegating the
Background screening process involved to the Nominating/Corporate Governance Commit-
tee.

Exhibit 4: Anaren Committee Composition

Source: investor.anaren.com retrieved on May 4, 2011

Only 2 of the 9 board members are insiders, which the investment team inferred
Board of Directors
that there is a lower chance of potential agency problems that may result in a
potential conflict of interest arising between creditors, shareholders and manage-
ment because of dissimilar goals. The Board believes that it is desirable to have
limited members of Management besides the Chief Executive Officer as Direc-
tors.

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 Anaren, Inc. Equity Research Report May 6, 2011

To analyze risk, we must account for Anaren’s organizational structure.

Risk
The Company is a third-tier component supplier that is heavily reliant on several
Analysis large prime contractors to generate the majority of the Company’s revenue. As a
consequence, issues that affect the large contractors will also affect demand for
Anaren products as a supplier. However, the degree to which Anaren is
affected depends on the Company’s involvement with prime contractors around
the world and the market demand for its products and services. Investment risk
has four main elements that interrelate with each other. The investment risk ele-
ments in Anaren include supplier risk, defense budget decline risk, and
foreign dependency risk.

Supplier Risk The firm relies only on a restricted amount of suppliers who provide products
and services to the company. Anaren currently does not have contractual obli-
gations with its suppliers, providing them with less guaranteed accessibility to
manufacturing materials. There could be a potential increase in production costs
or raw materials costs, potential delays in delivery of raw materials or finished
products, and reduced control over reliability and quality of components or as-
semblies as outsourcing continues.

Defense Budget Decline Risk
There may be a reduced comprehensive defense budget over the next few years.
Anaren has to compete with other programs in the future during the financial
allocation stage and allocation processes. These programs could be minimized,
prolonged or discontinued without notice, thereby negatively affecting The Com-
pany’s profitability.

Foreign Dependency Risk The Company established an assembly and test facility in Suzhou, China and a
sales and marketing group based in Suzhou to compete globally against low cost
manufacturers who primarily operate in the Asia Pacific rim. Operations in China
could be impacted by the political environment, trade relations and currency
fluctuations between the U.S. and Chinese governments. Anaren’s Suzhou, China
facility is in an economic development area impacted by China’s mass transit
system expansion. The Company relocated the Suzhou facility to a new facility
in the Suzhou Office Park during the second quarter of fiscal year 2011, and was
able to successfully transition to this new location. Their continued success relies
on being able to leverage this group to win customers.

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 Anaren, Inc. Equity Research Report May 6, 2011

A site visit was made Thursday, March 31st 2011 to Anaren’s East Syracuse cor-
Site Visit
porate office at 6635 Kirkville Road, East Syracuse, NY 13057. Anaren Corpo-
Report rate Offices is involved in the manufacturing of Anaren-Integrated Radio Mod-
ules, Xinger-brand microwave components, and Wireless Resistive Products.
John Hoeschele, Marketing Communications & Government Relations Manager,
provided a company strategic overview during an interview and a tour of the
manufacturing facility.

Anaren’s core competency is in its expertise in Microwave and RF Engineering.

The Wireless and Space and Defense industry makes up 40% and 60% of the
Company, respectively. Some of Anaren’s products compose 70%-80% of mar-
ket share. One such example is the Xinger® microwave component product line
that composes over 70% market share in its category.

The Company’s closest competitors include Florida RF, Merrimack and Cobham
PLC. Depending on the product competitor, the Defense industry companies
operate in a peculiar environment where companies can be competitors and
customers simultaneously. Anaren intends to stay as a 2nd and 3rd tier supplier,
which is less threatening to competitors and allows customers to remain loyal to
Anaren.

Anaren continues to compete extensively with other companies in industries such

as cell-phones, modems, and consumer electronics. Many larger companies are
moving towards purchasing products in “subssemblies,” or ready-made parts that
can be attached to other parts of already-existing larger products. The company
is following the lead of Detroit car manufacturers, who have been providing
ready-made products, or “assemblies,” that can be installed into cars as opposed
to purchasing individual parts.

To prepare this report, we obtained information from Anaren’s annual and quar-
Sources of terly reports, customized reports on future projects and current rates, and an
Information on-site executive management visit in East Syracuse, New York to meet with
John Hoeschele, Marketing Communications & Government Relations Man-
ager. Other sources of information included are Binghamton University’s Zurack
trading room, Bloomberg, Reuters, Thomson Reuters Baseline, Google finance,
Yahoo!Finance, SeekingAlpha.com, CNN Money, Standard and Poor’s net ad-
vantage, sec.gov, Business Wire, Factiva, and Anaren’s Web site.

Independent While conducting research for Anaren, we used analyst reports, a site visit to the
Outside company, and information other financial institutionals to compare Anaren’s pro-
prietary reports. Throughout our research, we realized that despite its relatively
Research
small footprint in the industry, Anaren is earning the attention and respect of
numerous industry professionals, analysts, and experts for its exceptional innova-
tion and performance.

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The Anaren Equity Analyst report is produced solely as a part of an educational program of Bing-
hamton University’s School of Management. The reports are not investment advice and you should
not and may not rely on them in making any investment decision. You should consult an investment
professional and/or conduct your own primary research regarding any potential investment.