Summary
- RF Industries is a micro-cap parts supplier that has struggled in 2020.
- For all that, the company is barely unprofitable, and trades at less than 9x 2019 earnings on an EV basis.
- With exposure to long-term growth trends and a clean balance sheet, it seems like this company (and its investors) could benefit from a post-vaccine normal.
The past seven market days have seen a snap-back rotation with the news of Pfizer’s (PFE) vaccine results, a two-day rally that gave weight to the ‘reopening’ trade, and then a reprisal on Moderna's (MRNA) news. My portfolio has been more oriented to reopening, apparently, which is another way of saying it’s heavier in small caps and ‘value.’
One stock that hasn’t seen much uplift from the reopening trade, but that should be a pandemic survivor and then a much higher valued company, is RF Industries (RFIL). The company sells communication equipment, and while this is a micro-cap company - $47.9M in TTM sales, $44M market cap – it appears their equipment is valuable to their customers. The company has managed to slog through the toughest part of the pandemic with minimal losses, has a clean balance sheet, and does not need a huge bounceback to surpass prior revenue levels, which I believe will lead to a higher valuation for the company.
RF Industries' Set-Up
RFIL has two main units, RF Connector and Cable Assembly; and Custom Cabling Manufacturing and Assembly. RF Connector and Cable Assembly provides small parts that go into connecting coaxial cables – coaxial cables being cables that: “consist of an insulated conducting tube through which a central, insulated conductor runs, used for transmitting high-frequency telephone, telegraph, digital, or television signals.”
These are sold via distributors – their most recent presentation mentions Anixter (AXE) and TESSCO (TESS) among others – and is a low-margin business, with pre-tax margins growing to 14% YTD. It’s also apparently a more consistent revenue business, as revenue is actually up 5% in this segment over the first nine months of FY 2020 (RFIL is on a November-October fiscal year, so they will report their Q4 in December). The margins seem a little fluky to me – they are double last year’s, and all the increase came in Q2/Q3, i.e. the pandemic affected quarters. But going back to at least FY 2008, this segment has produced $10-15M in revenue with pre-tax margins usually in the low to mid teens (there are divestitures here and there, so it’s not a one-to-one comparison over the years). This can be characterized as RF Industries’ “legacy’ segment, and provides them a baseline revenue/income even in tough times.
Source: RF Coax Connectors
RF Industries’ corporate story has been one of trying to diversify and add more profitable divisions, usually through acquisition and then often through disposals as divisions don’t work out, and that’s where the Custom Cabling segment comes in. This is made up of four divisions – Cables Unlimited (acquired in 2011), Rel-Tech (2015), C Enterprises (2019) and Schrofftech (2019, but FY 2020). Cables Unlimited and C Enterprises are Corning (GLW) CAH Connections Gold Program certified, for what it’s worth (indeed, only one of the other companies on the list is affiliated with a public company, WESCO (NYSE:WCC), so if you are looking for a pure-play Corning Gold Program company, RFIL is your best bet!). These divisions sell more directly to original equipment manufacturers in fields ranging from telecommunications to defense. While there’s some selling via distributors in this segment, this is where the bigger swings and bigger opportunities are for RF Industries.
