This quote from last night's conference call succinctly sums up the Generational Inflection Point at hand in Frequency Electronics Inc. (FEIM), a niche manufacturer of intricate and high-precision timing and frequency control products and components.
I have been waiting for this seminal inflection point for 10 years. Make no mistake. This is NOT a one-time inflection. An even more powerful year is forthcoming:
On the call, FEI President/CEO Tom McClelland, commented:
“In fiscal year 2024 we experienced steady revenue growth of 8-10% quarter-over-quarter for the entire year, with revenue year-over-year up by 36%. Revenue for FY2024 was $55.3 million, up from $40.8 million in FY2023. Operating income improved meaningfully, and we believe profits and margins should continue to do so going forward; due to both our disciplined internal management as well as a fortified product offering.
The backlog of $78 million at the end of the fiscal year ended April 30, 2024 is up substantially from FY2023, and represents a historical high for the Company. This steady growth in backlog is indicative of the strong business environment for our technology as well as our reinvigorated customer focused strategy combined with our commitment to bring faster, better solutions to market. We anticipate continued growth in new business during the current fiscal year ending April 30, 2025.
Our efforts have put us on a positive trajectory. The Company remains committed to achieving sustained profitability and strong cash generation going forward. I have never been more encouraged about our ability to provide important solutions that help to enhance our way of life, and to defend and protect our country and its allies.”
Frequency's biz is easy to model out on an annual basis. Note how the backlog at the end of each fiscal year correlates strongly with the upcoming fiscal year:
With its backlog up 37% YoY to $78M, a multi-quarter and, more likely, a multi-year Inflection Point is at hand for FEIM. We attach 80% odds that FEIM will do at least $74M in Revenues this upcoming Fiscal Year, 2025.
Importantly, on the conference call last night, FEIM stated that its cost structure will mostly remain flat, leading to increased margins and profits.
Take a look at FEIM’s Q4 financials and then extrapolate a $62M Annualized Revenue Run-Rate:
We believe FEIM will do Revenue of $74M in this FY25. This translates to $18.5M a quarter. The drop-down leverage on these additional $3M a quarter logged in relation to last night’s $15.58M Q4 results, would translate to four $0.40 Quarters forthcoming.
Unfortunately, it's not quite that easy. This is a very lumpy business quarter-to-quarter. FEIM works with a lot of new space programs whose tumultuous development phases can often lead to a tough quarter or two. Thankfully, we are passed such an investment phase window. BUT there will be another one forthcoming. Therefore, no guarantee we see $1.60 in EPS in FY25.
Still, with potential upside in Gross Margin to the mid-$40s, FEIM is now in a much stronger position to still grow quite profitably even during these investment phases. This is why the company is giving shareholders a special $1 dividend. Management sees what lies ahead: the most powerful Inflection Point and growth curve in revenue and earnings in company history – a Generational Inflection Point.
Assuming FEIM does $1.50 EPS in FY25, this would represent almost 200% EPS Growth YoY. At a minimum, even for a small company with no analyst coverage, FEIM’s multiple should still re-rate to an 18x P/E. This would equate to a double over the next 12 months from the After Hours mid-$13s levels.
The Inflection Point at hand here will cause an explosion in FEIM's stock in the coming days and weeks.
We want you to buy into this Inflection Point on any dips toward VWAP during the day today. Additionally, we would add on any shakeout to the $12s in the coming days.
STOP LOSS: We think the announced Special One-Time Dividendis an important signal that the next few quarters will be even more powerful Inflection Points. We want to be there for the move toward/into the $20s and therefore will be implementing a 3mo Time Stop on this trade.
Check out FEIM’s monthly chart – POWERFUL comes to mind – the Measured Move gets us to $21-$22:
One final fundamental tidbit. Hat Tip to FEIM's recently-appointed CEO, Tom McClelland. In 18 months, McClelland has shepherded record business wins as well as HUGE step up in the company’s profitability metrics. Kudos Tom!
Liquidity risk comes to mind. While we expect the stock to trade 500k-1M shares today, in the coming days liquidity will dry up. Staying small is therefore prudent.
Longer-term, while FEIM’s business is booming now, the Space Industry is experiencing a shift to smaller satellites that are replaced every 3 years, not every 10. This shift may result in margin compression on future contract wins, as FEIM is tested not only to deliver on accelerated timelines, but by taking margin risks as well. Thankfully, this risk is very muted this upcoming fiscal year.
Finally, on Quarter-to-Quarter basis, there is the “lumpiness factor” we mentioned earlier. We will never know what quarter is going to be an “investment quarter,” where FEIM is struggling to get its development contracts sorted out. This occurred the two quarters before last night’s Inflection Point report. This is another reason to maintain a “Sleep Well At Night” sized position.
The risks to the FEIM story have been well articulated. We choose to look at the record backlog, record profits and upside levers on the way this fiscal year to bring about continued record revenues and earnings as well as a further boost in its backlog.
In summary, while on the smaller and illiquid side, make no mistake, FEIM is a Top Tier Inflection with 70% odds it rises 50-100% the next 6-12 months.
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Disclosure: We are long FEIM stock. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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