I first bought Airvana in early 2008 when it showed up on a Magic Formula value screen.

Although Airvana doesn't show up on the Magic Formula list at the present time (presumably because the TTM GAAP numbers show a loss), and although I have about a 50% gain on my Airvana shares, I used AAII Stock Investor Pro to generate the two key metrics used in the Magic Formula: pre-tax earnings yield and pre-tax return on tangible capital employed. But, instead of using GAAP numbers, I inserted TTM pre-tax operating income based on billings and adjusting for the uncollected pre-bankruptcy Nortel receivables. The pre-tax operating income computed in this fashion for the most recent four quarters is about $39 million.

Using this number in conjunction with an enterprise value of $240 million and tangible capital employed (as computed using a custom macro in Stock Investor Pro) of about $13 million, I come up with the following Magic Formula parameters:

Pre-tax earnings yield = 16%

Pre-tax return on tangible capital employed = 200%

These are good numbers, and would tend to indicate that Airvana stock remains undervalued. Normally I stick with GAAP numbers when valuing a stock, but in Airvana's case we have the complicating factor of the very lumpy way in which revenue is recognized, plus the one-time ding caused by Nortel's bankruptcy.

The future is impossible to predict, but Airvana appears to be in a good position to grow its business during and after the recession, and the company has plenty of cash. And they don't appear to be doing anything stupid with their cash, though a dividend would probably be in order at some point when GAAP profit resumes.