RF Industries: Premium Valuations Embed Expectations for Special Dividend
Since 2004, RFIL has purchased the operations of four smaller businesses: Aviel Electronics in August 2004, Oddcables.com in September 2005, RadioMobile Inc. in September and Cables Unlimited in June 2011, as part of its strategy to expand product lines and/or customer bases.
RFIL currently trades at a trailing twelve months P/E of 23.29 and a trailing 12 months EV/EBITDA of 8.59. Its current P/E valuation represents a 36% premium to its five-year average P/E of 17.06. RFIL achieved a 7.4% ROE for the past 12 months and a five-year average ROE of 6.7%.
Financial and Business Risks
RFIL is debt-free with net cash of $5.6 million representing 19% of its current market capitalization of $29.7 million.
RFIL's primary customers are companies in the communications industries, which buy its coaxial connectors. RFIL conducts its sales largely through independent distributors, with independent distributors and its largest customer accounting for 49% and 17% of its fiscal 2011 sales, respectively. RFIL has had business relationships with this particular customer for more than 10 years.
According to data from the management, the global industry for interconnect products and systems is highly fragmented with over 2,000 producers of connectors and interconnect systems, with the 10 largest companies constituting 61% of the $45 billion market and no single competitor having more than 15% market share.
Business Quality and Capital Allocation
RFIL has been profitable in the past decade and free cash flow positive for 9 out of the last 10 years. It is also showing improvement in inventory management, with inventory days dropping below 200 days in fiscal 2011 for the first time in 10 years.
Net sales for the first nine months ended July 31, 2012, increased by 31% year on year, largely attributed to the addition of Cables Unlimited and its sales of its new fiber optic cable assemblies — OptiFlex Hybrid Custom Fiber Optic & DC Power Cabling solution that was commercially released in June 2012. The acquisition of Cables Unlimited in 2011 allowed RFIL to offer a wide range of interconnect products and systems that its largest customers needed, but it was unable to provide for previously.
RFIL initiated dividends in 2007 and paid dividends every year since then, except for 2009. RFIL currently sports an annualized dividend yield of 4.7% (excluding special dividends). In fiscal year 2011, RFIL paid four quarterly dividends and one special dividend payment of $0.25 per share. If the special dividend is included, the adjusted dividend yield will be close to 9%.
In the first nine months ended July 31, 2012, RFIL spent $1,143,243 on share repurchases. RFIL also
repurchased 31,812 shares of its common stock, for a total of $102,705 in fiscal 2011.
The author does not have a position in any of the stocks mentioned.