RF Industries, Ltd.: Tiny 5G Stock Is Set to Grow

RF Industries, Ltd.: Tiny 5G Stock Is Set to Grow

Why 5G Could Accelerate RF Industries Stock’s Growth

The demand for 5G technologies will be huge, and that will provide opportunities for many companies. President Joe Biden is fully supporting the drive to develop 5G technologies in the U.S.

To play the communications technology space, investors can look at the major players or, for added risk/reward potential, consider a micro-cap player like RF Industries, Ltd. (NASDAQ:RFIL).

The company, which makes interconnect products for communication systems, has a long history, having been around since 1979. It has, however, failed to deliver consistent financial growth.

But with the increasing demand for wireless/wireline telecom and data communications, including 5G, RF Industries stock could break out.

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RFIL Stock Set to Break Out

A look at the below chart shows RFIL stock rising last December on the heels of a golden cross pattern, a bullish technical formation in which the 50-day moving average moves above the 200-day moving average. The crossover indicates more gains ahead.

RF Industries stock then failed to hold, declining to the $6.00 level in March. That was followed by a strong rally to a 52-week high on July 30 after the emergence of a bullish ascending triangle pattern.

Next up for shares of RF Industries, Ltd. will be the $13.00 level, last encountered in August 2018.

Investors should be careful, as the softening in the relative strength index (RSI) and moving average convergence/divergence (MACD) could see RFIL stock retest its 50-day moving average at $8.16.

Chart courtesy of StockCharts.com

RF Industries, Ltd.’s Revenues Set to Pop

RF Industries, Ltd.’s lack of revenue consistency over the last five years has been a problem, but the situation looks like it will improve.

Fiscal YearRevenues (Millions)Growth
2016$30.2N/A
2017$23.0-24.0%
2018$50.0118.4%
2019$55.310.2%
2020$43.0-22.2%

(Source: “RF Industries Ltd.” MarketWatch, last accessed August 5, 2021.)

Following the dismal results in 2020, which were partly due to the COVID-19 pandemic, RF Industries is expected to grow its revenues by 16.3% to $50.1 million this year and by 50.4% to $75.3 million in 2022. (Source: “RF Industries, Ltd. (RFIL),” Yahoo! Finance, last accessed August 5, 2021.)

Based on the estimates, the forward valuation looks compelling, with RF Industries, Ltd. trading at 1.2 times its 2022 revenue estimate.

In the last five years, RF Industries, Ltd. delivered earnings before interest, taxes, depreciation, and amortization (EBITDA) income in each year. The issue has been a lack of consistent growth.

Fiscal YearEBITDAGrowth
2016$10,000N/A
2017$709,0006,900%
2018$8.0 Million1,023%
2019$5.1 Million-35.7%
2020$654,000-87.2%

(Source: MarketWatch, op. cit.)

RF Industries has managed to generate generally accepted accounting principles (GAAP) earnings-per-share (EPS) profits in three of the last five years. That’s excellent for such a small company.

Fiscal YearGAAP Diluted EPSGrowth
2016-$0.47N/A
2017$0.04109.1%
2018$0.691,518%
2019$0.36-18.4%
2020-$0.01-192.4%

(Source: MarketWatch, op. cit.)

On an adjusted basis, RF Industries, Ltd. made money in 2020. It’s expected to increase that by more than 100% to $0.17 per diluted share this year and then more than double that to $0.41 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

Even more encouraging, the company produced positive free cash flow (FCF) in three of the last five years, including $4.3 million in 2020. The fact that such a small company can produce good fundamentals is impressive. As RF Industries’ revenues and earnings rise, I expect its FCF to follow.

Fiscal YearFCFGrowth
2016-$1.7 MillionN/A
2017$597,000136.2%
2018$5.0 Million738.2%
2019-$3.3 Million-164.9%
2020$4.3 Million232.8%

(Source: MarketWatch, op. cit.)

Moreover, RF Industries, Ltd. has strong working capital, cash of $14.8 million, and minimal debt of $1.1 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

In my view, RF Industries, Ltd.’s strong fundamentals and valuation, especially for such a small company, suggest that RFIL stock is undervalued and could climb.

Insiders understand, so they’ve been net buyers of RF Industries stock over the last six months. The attractive price-to-sales ratio provides cushioning and the potential for a much higher share price.