RF Industries Outperforms On Growing Backlog
RF Industries (NASDAQ: RFIL) entered our sphere of coverage earlier this year after it reported better-than-expected earnings. The company makes a wide array of RF connectors and coaxial cable products that are in high demand from the growing 5G industry, among others. The 5G revolution hasn't been getting much coverage lately but, rest assured, it is still underway. Not only are the major carriers actively expanding their networks, but they are also increasing the density of their coverage and that means RF connectors and coaxial cable.
RF Industries Blows Past Consensus
RF Industries had a good quarter no matter how you look at it. The caveat is that GAAP top and bottom-line results were greatly impacted by ERC credits earned over the past year. That aside, even the adjusted results are strong and show an acceleration of business that is expected to continue into the fourth quarter. The company reported $15.26 in net revenue to post a gain of 38% sequentially and 60% over last year to beat the consensus by $1.80 million. Notably, the ERC credits are worth $0.80 million which brings the YOY growth to just over 30% and leaves the adjusted margin above consensus by 700 basis points. The biggest negative in terms of revenue is that revenue is slightly down on a 2-year basis but we see this company surpassing those levels very soon.
Moving down the report, the company experienced a significant increase in margin due to the ERC credits. When adjusted, adjusted gross margin improved by 100 basis points over last year and drove solid bottom-line results. At the GAAP level, which includes the ERC credits, the company reported $0.09 to beat the consensus by $0.03. At the adjusted level, which excludes the impact of the ERC credits, the company reported $0.13 to beat the consensus by a nickel.
The company did not give specific guidance for the fourth quarter but it did provide detail and commentary to the effect sequential growth is expected.
“With our large backlog and continued sales momentum, we expect a strong finish to the fiscal year with fourth quarter sales higher than the third quarter and exceeding our previous expectations. At this point in the fourth quarter, our year-to-date revenue already exceeds our full fiscal 2020 total revenue,” says CEO Robert Dawson.
RF Industries Is An Undervalued Micro-cap Growth Stock
RF Industries is highly valued trading at 50X its consensus estimates but that consensus is obviously wrong. Based on the year-to-date results, the company is trading closer to 15X its earnings and possibly lower if the business acceleration continues. Coincidentally, data from Pricetargets.com shows the one analyst currently tracking the stock reiterated their buy rating in the wake of the earnings report and raised the price target from $9 to $10. That is good for a gain of 17% from the current price action.
The Technical Outlook: RF Industries Pulls Back To Support
RF Industries provided a good report and a positive outlook but shares are pulling back in the wake of the release. In our view, this is opening up another buying opportunity with the possibility of getting shares near the $8 level. For now, it looks like the short-term moving average is providing support. If support at the short-term moving average continues to hold we would expect to see price action move sideways and then move up to retest resistance at the $9 range before moving even higher. If the short-term moving average fails to hold, this stock could move down to $8 or lower.
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