R F INDUSTRIES LTD RFIL
December 02, 2011 - 4:43pm EST by
googie974
2011 2012
Price: 3.50 EPS $0.19 $0.00
Shares Out. (in M): 7 P/E 18.0x 0.0x
Market Cap (in $M): 25 P/FCF 0.0x 0.0x
Net Debt (in $M): -5 EBIT 0 0
TEV ($): 20 TEV/EBIT 0.0x 0.0x

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Description

RF Industries is primarily an RF connector and cable assembly designer and manufacturer that has been profitable for 19 years.  The business earns a respectable return on invested capital that averages 13.5% over the last 6 years.  The overall return on equity has been only in the single digits, however, as the company has persistently carried large cash and CD balances.  While the stock has risen slowly the last few years, there are now a couple of catalysts that may enhance shareholder returns.  The first catalyst is that an activist investor, David Sandberg, has effectively taken control of the company and is working down the low-yielding cash & securities balance.  The company has paid a special dividend of $0.25, increased the normal dividend to $0.20/ year (5.7% yield), made a significant acquisition, and announced a stock buyback.  Further, the activist investor has been named to the board of directors and currently leads a committee to explore options to improve shareholder value.

 In recent years, the profitability of the company's primary division, the RF Connector and Cable Assembly division, has grown.  This is due to growth from the roll-out of 4G and Wi-Max networks and the proliferation of OEM wireless equipment incorporating RF connectors.  This divisions improved profitability is not evident in the company's bottom line, however.  Losses in the company's relatively new RF Wireless division, in part due to high R&D costs on new products, has offset the improved connector divisions profitability.  A second catalyst is that the money-losing RF Wireless division has now gotten their new products to market and will begin earning revenue.  Recently they received a significant order from the LA county fire department that will end the divisions losses.  If further orders to maintain profitability don't follow, David Sandberg, who chairs a special committee commissioned in part to review this division, will likely eliminate the division by disposition or shut-down.  One way or another, the losses will end and the profitability growth of the core connectors business will be evident to investors.

 Between the investment of cash in the recent acquisition, the end of the RF Wireless division losses, the stock buyback, the return of capital to shareholders in the form of dividends, and whatever else the strategic review comes up with, there is opportunity for significantly improved earnings/share, return on equity, and stock price appreciation.

Business Description (from 10-K)

RF Industries, Ltd. (hereinafter the “Company”) is a provider of interconnect products and systems for radio frequency (RF) communications devices and wireless digital transmission systems. For internal operational purposes, and for marketing purposes, the Company currently classifies its operations into the following six related divisions: (i) The Connector and Cable Assembly Division designs, manufactures and distributes coaxial connectors and cable assemblies that are integrated with coaxial connectors; (ii) the Aviel Electronics Division designs, manufactures and distributes specialty and custom RF connectors primarily for aerospace and military customers, (iii) the Oddcables.com Division primarily sells coaxial, fiberoptic, and other connectors and cable assemblies on a retail basis to local multi-media and communications customers; (iv) the Bioconnect Division manufactures and distributes cabling and interconnect products to the medical monitoring market; (v) the Neulink Division is engaged in the design, manufacture and sale of RF data links and wireless modems for receiving and transmitting control signals for remote operation and monitoring of equipment, personnel and monitoring services; and (vi) the RadioMobile Division is an original equipment manufacturer (OEM) provider of end-to-end mobile management solutions implemented over wireless networks that supplement the operations of the Company’s Neulink division.

 

The Connector and Cable Assembly Division is the original company division founded in 1980.  It still accounts for 85% of revenues to this day.  The Bioconnect division was acquired in 2000 and has shown some intriguing revenue growth in recent years although it remains small.  The Radio Mobile business was acquired on Sept 1., 2007.  It has been spending heavily on R&D recently to develop wireless radio networks including both voice and data used by police and fire departments.  Their wireless radio networks business competes by offering to customize software to meet the specific needs of the customer.

 

Historical Financials

 Revenue, assets, and EBIT numbers in recent years for the companies reporting segments are tabulated below.  Note the growth in profitability of the RF Connector and Cable Assembly division and the losses in the RF Wireless division that includes Radio Mobile.   On Nov. 8th, 2011 RF Industries announced a $2.5 million contract to upgrade the Los Angeles County Fire Departments mobile radio system from 1985 technology to present day.  RF Industries ability to integrate their new technology with the 1985 technology without downtime was cited as the reason they were selected.  Notice also the growth in the Medical Cabling and Interconnector division.  Management indicated on the most recent conference call that they expect this growth to continue.

 

 

 

RF

Connector

and Cable

Assembly

Medical

Cabling and

Interconnector

RF

Wireless

Corporate

Total

2010

 

 

 

 

 

 Sales

14,094,158

1,724,819

503,201

 

16,322,178

EBIT

2,606,201

306,161

(908,142)

86,614

2,090,834

D&A

164,055

23,315

26,896

 

214,266

Total Assets

4,204,819

316,149

617,202

13,971,193

19,109,363

Capital Spending

115,839

32,549

3,462

 

151,850

 

 

 

 

 

 

2009

 

 

 

 

 

 Sales

12,153,597

1,323,640

735,808

 

14,213,045

EBIT

1,604,193

114,333

(812,386)

193,429

1,099,569

D&A

193,512

13,613

32,652

 

239,777

Total Assets

4,505,866

289,911

919,432

10,882,991

16,598,200

Capital Spending

187,417

16,820

13,155

 

217,392

 

 

 

 

 

 

2008

 

 

 

 

 

Sales

13,936,241

1,638,010

2,120,895

 

17,695,146

EBIT

2,123,740

287,922

101,280

258,831

2,771,773

D&A

155,877

24,669

30,842

 

211,388

Total Assets

5,355,248

441,946

1,119,775

10,850,804

17,767,773

Capital Spending

438,010

21,968

1,088

 

461,066

 

 

 

 

 

 

2007

 

 

 

 

 

Sales

12,813,184

893,725

1,146,130

 

14,853,039

EBIT

1,368,605

125,103

225,778

359,113

2,078,599

D&A

230,688

37,427

592

 

268,707

Total Assets

4,645,092

152,895

836,287

10,493,884

16,128,158

Capital Spending

93,823

 

 

 

93,823

 

 

 

 

 

 

2006

 

 

 

 

 

Sales

 

 

 

 

15,187,893

 

 

 

 

 

 

2005

 

 

 

 

 

Sales

 

 

 

 

13,151,576

 

 

 

 

 

 

 

Historical annual return on invested capital and cash balances data for the last 6 years is tabulated below.  I've backed the considerable Cash & Securities out of Shareholders equity and 60% (assuming 40% tax rate) of the interest out of net income to arrive at invested capital and return on invested capital.  The business has produced a respectable return.  Yet, considerable cash has been left for years in money market accounts and low-yielding CD's.   

 

Shareholders Equity

Income

Interest

Income-0.6*Interest

Cash & Securities

Invested Capital

ROE

ROIC

2010

16,913,960

1,220,247

86,614

1,168,278

9,306,454

7,607,506

7.21%

15.36%

2009

15,235,482

655,967

193,429

539,910

7,702,908

7,532,574

4.31%

7.17%

2008

16,121,690

1,559,233

258,381

1,404,204

7,924,549

8,197,141

9.67%

17.13%

2007

14,940,793

1,135,223

359,113

919,755

7,932,246

7,008,547

7.60%

13.12%

2006

13,463,909

1,540,672

335,604

1,339,310

6,865,524

6,598,385

11.44%

20.30%

2005

11,206,404

444,660

96,729

386,623

6,397,919

4,808,485

3.97%

8.04%

 

Activism

Red Oak Partners is a New York area hedge fund with approximately $24 million in assets.  The Red Oak Fund was founded by David Sandberg in 2003.  It invests in underfollowed or mispriced micro-cap situations sometimes becoming an activist.  Since inception the fund has a 17.44% CAGR net of fees.  Prior to founding Red Oak Partners, David Sandberg  managed the JH Whitney Green River Fund from 1998-2002.  Between these two stints David Sandberg shows a CAGR exceeding 20% net of fees employing a strategy with a long holding period (90% of gains were long-term). 

The Red Oak fund began purchasing shares in RF Industries in 2010 and filed a 13-D with the SEC on Dec. 13th, 2010 disclosing ownership of 6.74% of the outstanding shares.  Continued buying in 2011 brought ownership to 9.19%.  Mr. Sandberg's complaints included the hoarding of cash at low returns, the losses in the radio mobile business, long-standing directors that owned little or no stock, and no M&A expertise on the board of directors.  It appeared to him that there was inadequate concern on the part of management to maximize earnings and that this was in part because they owned so few shares.  Mr Sandberg threatened a proxy battle resulting in an August 29th agreement with the company.  Mr. Sandberg would join the board of directors along with Randall Waterfield, a designee of Mr. Sandberg.  A nominating committee for future board of director membership would be formed that would disfavor anyone who owned less than $35,000 of RF Industries stock.  A second committee would be headed by Mr. Sandberg to explore strategies for maximizing shareholder returns, specifically considering the money-losing Radio Mobile product line and the company's future cash needs.

On Oct. 18th, 2011 the company announced a $1.25 million buyback authorization with this comment

"Considering RFI's record sales and growth opportunities, the Board believes that current market conditions afford the Company the opportunity to buy back its common shares at attractive prices. RFI's continuing strong cash position enables us to implement this repurchase program without adversely affecting the Company's capital requirements, dividends and requirements for operating liquidity," said Howard Hill, RFI's CEO.

A special one-time dividend of $0.25 was paid in October and the current dividend is $0.05 per quarter for a dividend yield of 5.7%.

In June of 2011, the company acquired Cables Unlimited for $5.6 million.  This acquisition has strategic value in that it permits RF Industries to be a one stop supplier to OEM's who need both RF connectors and cables.  One must be skeptical of overpaying for acquisitions but this one does appear to have genuine synergies.  Investing $5.6 million in cash that was earning almost nothing in a money-market account certainly appears attractive.  Unfortunately, the company paid half in cash and half in stock at a stock price close to the current $3.50 price.  I trust with David Sandberg on the board of directors they'll be more careful about issuing shares in the future.

Investment Thesis

The company's idle cash hoard is being put to work or distributed to shareholders.  I expect with Red Oak's activism we'll see this trend continue.  The historical single digit return on equity should rise closer to the historical 13.5% return on capital.  With some revenue growth leverage from the acquisitions, organic growth in the connector business, and elimination of the radio mobile losses, the return on equity could go higher than the historical ROIC.  The stock would then trade at a multiple of book value rather than the 1.3 times book that it does now.  In the meantime the debt-free business is growing with consistent profitability and pays a 5.7% dividend.  The downside seems limited.

Catalyst

Radio Mobile losses are ending
Cash hoard is being invested or returned to shareholders
    sort by    

    Description

    RF Industries is primarily an RF connector and cable assembly designer and manufacturer that has been profitable for 19 years.  The business earns a respectable return on invested capital that averages 13.5% over the last 6 years.  The overall return on equity has been only in the single digits, however, as the company has persistently carried large cash and CD balances.  While the stock has risen slowly the last few years, there are now a couple of catalysts that may enhance shareholder returns.  The first catalyst is that an activist investor, David Sandberg, has effectively taken control of the company and is working down the low-yielding cash & securities balance.  The company has paid a special dividend of $0.25, increased the normal dividend to $0.20/ year (5.7% yield), made a significant acquisition, and announced a stock buyback.  Further, the activist investor has been named to the board of directors and currently leads a committee to explore options to improve shareholder value.

     In recent years, the profitability of the company's primary division, the RF Connector and Cable Assembly division, has grown.  This is due to growth from the roll-out of 4G and Wi-Max networks and the proliferation of OEM wireless equipment incorporating RF connectors.  This divisions improved profitability is not evident in the company's bottom line, however.  Losses in the company's relatively new RF Wireless division, in part due to high R&D costs on new products, has offset the improved connector divisions profitability.  A second catalyst is that the money-losing RF Wireless division has now gotten their new products to market and will begin earning revenue.  Recently they received a significant order from the LA county fire department that will end the divisions losses.  If further orders to maintain profitability don't follow, David Sandberg, who chairs a special committee commissioned in part to review this division, will likely eliminate the division by disposition or shut-down.  One way or another, the losses will end and the profitability growth of the core connectors business will be evident to investors.

     Between the investment of cash in the recent acquisition, the end of the RF Wireless division losses, the stock buyback, the return of capital to shareholders in the form of dividends, and whatever else the strategic review comes up with, there is opportunity for significantly improved earnings/share, return on equity, and stock price appreciation.

    Business Description (from 10-K)

    RF Industries, Ltd. (hereinafter the “Company”) is a provider of interconnect products and systems for radio frequency (RF) communications devices and wireless digital transmission systems. For internal operational purposes, and for marketing purposes, the Company currently classifies its operations into the following six related divisions: (i) The Connector and Cable Assembly Division designs, manufactures and distributes coaxial connectors and cable assemblies that are integrated with coaxial connectors; (ii) the Aviel Electronics Division designs, manufactures and distributes specialty and custom RF connectors primarily for aerospace and military customers, (iii) the Oddcables.com Division primarily sells coaxial, fiberoptic, and other connectors and cable assemblies on a retail basis to local multi-media and communications customers; (iv) the Bioconnect Division manufactures and distributes cabling and interconnect products to the medical monitoring market; (v) the Neulink Division is engaged in the design, manufacture and sale of RF data links and wireless modems for receiving and transmitting control signals for remote operation and monitoring of equipment, personnel and monitoring services; and (vi) the RadioMobile Division is an original equipment manufacturer (OEM) provider of end-to-end mobile management solutions implemented over wireless networks that supplement the operations of the Company’s Neulink division.

     

    The Connector and Cable Assembly Division is the original company division founded in 1980.  It still accounts for 85% of revenues to this day.  The Bioconnect division was acquired in 2000 and has shown some intriguing revenue growth in recent years although it remains small.  The Radio Mobile business was acquired on Sept 1., 2007.  It has been spending heavily on R&D recently to develop wireless radio networks including both voice and data used by police and fire departments.  Their wireless radio networks business competes by offering to customize software to meet the specific needs of the customer.

     

    Historical Financials

     Revenue, assets, and EBIT numbers in recent years for the companies reporting segments are tabulated below.  Note the growth in profitability of the RF Connector and Cable Assembly division and the losses in the RF Wireless division that includes Radio Mobile.   On Nov. 8th, 2011 RF Industries announced a $2.5 million contract to upgrade the Los Angeles County Fire Departments mobile radio system from 1985 technology to present day.  RF Industries ability to integrate their new technology with the 1985 technology without downtime was cited as the reason they were selected.  Notice also the growth in the Medical Cabling and Interconnector division.  Management indicated on the most recent conference call that they expect this growth to continue.

     

     

     

    RF

    Connector

    and Cable

    Assembly

    Medical

    Cabling and

    Interconnector

    RF

    Wireless

    Corporate

    Total

    2010

     

     

     

     

     

     Sales

    14,094,158

    1,724,819

    503,201

     

    16,322,178

    EBIT

    2,606,201

    306,161

    (908,142)

    86,614

    2,090,834

    D&A

    164,055

    23,315

    26,896

     

    214,266

    Total Assets

    4,204,819

    316,149

    617,202

    13,971,193

    19,109,363

    Capital Spending

    115,839

    32,549

    3,462

     

    151,850

     

     

     

     

     

     

    2009

     

     

     

     

     

     Sales

    12,153,597

    1,323,640

    735,808

     

    14,213,045

    EBIT

    1,604,193

    114,333

    (812,386)

    193,429

    1,099,569

    D&A

    193,512

    13,613

    32,652

     

    239,777

    Total Assets

    4,505,866

    289,911

    919,432

    10,882,991

    16,598,200

    Capital Spending

    187,417

    16,820

    13,155

     

    217,392

     

     

     

     

     

     

    2008

     

     

     

     

     

    Sales

    13,936,241

    1,638,010

    2,120,895

     

    17,695,146

    EBIT

    2,123,740

    287,922

    101,280

    258,831

    2,771,773

    D&A

    155,877

    24,669

    30,842

     

    211,388

    Total Assets

    5,355,248

    441,946

    1,119,775

    10,850,804

    17,767,773

    Capital Spending

    438,010

    21,968

    1,088

     

    461,066

     

     

     

     

     

     

    2007

     

     

     

     

     

    Sales

    12,813,184

    893,725

    1,146,130

     

    14,853,039

    EBIT

    1,368,605

    125,103

    225,778

    359,113

    2,078,599

    D&A

    230,688

    37,427

    592

     

    268,707

    Total Assets

    4,645,092

    152,895

    836,287

    10,493,884

    16,128,158

    Capital Spending

    93,823

     

     

     

    93,823

     

     

     

     

     

     

    2006

     

     

     

     

     

    Sales

     

     

     

     

    15,187,893

     

     

     

     

     

     

    2005

     

     

     

     

     

    Sales

     

     

     

     

    13,151,576

     

     

     

     

     

     

     

    Historical annual return on invested capital and cash balances data for the last 6 years is tabulated below.  I've backed the considerable Cash & Securities out of Shareholders equity and 60% (assuming 40% tax rate) of the interest out of net income to arrive at invested capital and return on invested capital.  The business has produced a respectable return.  Yet, considerable cash has been left for years in money market accounts and low-yielding CD's.   

     

    Shareholders Equity

    Income

    Interest

    Income-0.6*Interest

    Cash & Securities

    Invested Capital

    ROE

    ROIC

    2010

    16,913,960

    1,220,247

    86,614

    1,168,278

    9,306,454

    7,607,506

    7.21%

    15.36%

    2009

    15,235,482

    655,967

    193,429

    539,910

    7,702,908

    7,532,574

    4.31%

    7.17%

    2008

    16,121,690

    1,559,233

    258,381

    1,404,204

    7,924,549

    8,197,141

    9.67%

    17.13%

    2007

    14,940,793

    1,135,223

    359,113

    919,755

    7,932,246

    7,008,547

    7.60%

    13.12%

    2006

    13,463,909

    1,540,672

    335,604

    1,339,310

    6,865,524

    6,598,385

    11.44%

    20.30%

    2005

    11,206,404

    444,660

    96,729

    386,623

    6,397,919

    4,808,485

    3.97%

    8.04%

     

    Activism

    Red Oak Partners is a New York area hedge fund with approximately $24 million in assets.  The Red Oak Fund was founded by David Sandberg in 2003.  It invests in underfollowed or mispriced micro-cap situations sometimes becoming an activist.  Since inception the fund has a 17.44% CAGR net of fees.  Prior to founding Red Oak Partners, David Sandberg  managed the JH Whitney Green River Fund from 1998-2002.  Between these two stints David Sandberg shows a CAGR exceeding 20% net of fees employing a strategy with a long holding period (90% of gains were long-term). 

    The Red Oak fund began purchasing shares in RF Industries in 2010 and filed a 13-D with the SEC on Dec. 13th, 2010 disclosing ownership of 6.74% of the outstanding shares.  Continued buying in 2011 brought ownership to 9.19%.  Mr. Sandberg's complaints included the hoarding of cash at low returns, the losses in the radio mobile business, long-standing directors that owned little or no stock, and no M&A expertise on the board of directors.  It appeared to him that there was inadequate concern on the part of management to maximize earnings and that this was in part because they owned so few shares.  Mr Sandberg threatened a proxy battle resulting in an August 29th agreement with the company.  Mr. Sandberg would join the board of directors along with Randall Waterfield, a designee of Mr. Sandberg.  A nominating committee for future board of director membership would be formed that would disfavor anyone who owned less than $35,000 of RF Industries stock.  A second committee would be headed by Mr. Sandberg to explore strategies for maximizing shareholder returns, specifically considering the money-losing Radio Mobile product line and the company's future cash needs.

    On Oct. 18th, 2011 the company announced a $1.25 million buyback authorization with this comment

    "Considering RFI's record sales and growth opportunities, the Board believes that current market conditions afford the Company the opportunity to buy back its common shares at attractive prices. RFI's continuing strong cash position enables us to implement this repurchase program without adversely affecting the Company's capital requirements, dividends and requirements for operating liquidity," said Howard Hill, RFI's CEO.

    A special one-time dividend of $0.25 was paid in October and the current dividend is $0.05 per quarter for a dividend yield of 5.7%.

    In June of 2011, the company acquired Cables Unlimited for $5.6 million.  This acquisition has strategic value in that it permits RF Industries to be a one stop supplier to OEM's who need both RF connectors and cables.  One must be skeptical of overpaying for acquisitions but this one does appear to have genuine synergies.  Investing $5.6 million in cash that was earning almost nothing in a money-market account certainly appears attractive.  Unfortunately, the company paid half in cash and half in stock at a stock price close to the current $3.50 price.  I trust with David Sandberg on the board of directors they'll be more careful about issuing shares in the future.

    Investment Thesis

    The company's idle cash hoard is being put to work or distributed to shareholders.  I expect with Red Oak's activism we'll see this trend continue.  The historical single digit return on equity should rise closer to the historical 13.5% return on capital.  With some revenue growth leverage from the acquisitions, organic growth in the connector business, and elimination of the radio mobile losses, the return on equity could go higher than the historical ROIC.  The stock would then trade at a multiple of book value rather than the 1.3 times book that it does now.  In the meantime the debt-free business is growing with consistent profitability and pays a 5.7% dividend.  The downside seems limited.

    Catalyst

    Radio Mobile losses are ending
    Cash hoard is being invested or returned to shareholders
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