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Rada Electronics: A Potential Value Opportunity

The defense company is profitable and growing

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Mar 07, 2022
Summary
  • The company has several factors working in its favor.
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Rada Electronics Industries Ltd. (

RADA, Financial) is an Israel-based niche defense, aerospace and homeland security contractor specializing in electronic technologies. Combat-proven products include avionic systems, high-definition digital video, audio and recording devices for training craft, fighter jets, drones and land-based, tactical, multi-mission radars. Radar products are compact and secured to lightweight platforms. It can mount them to land vehicles and ships to detect and track aerial and ground threats from high-speed and slow-moving drones, vehicles, ships and boats and even people on foot.

Positives

Rada is a tiny, profitable, young and growing player in the hot defense industry. Aerospace and defense stocks have risen for four consecutive years. The SPDR S&P Aerospace & Defense ETF's (

XAR, Financial) shares are up 63% from $77 to $122. Rada shares were $3.05 at the beginning of 2018 and closed this past week over $13. The 12-month target price is $15.50 and the stock is forecasted to hit a high of at least $17. The stock deserves its outperform rating.

Events igniting these stocks include Russia’s years-long Crimea campaign, military moves in Syria and Iraq and the invasion of Ukraine. Adding to the momentum are Turkey’s cross-border incursions and bellicose threats, America’s Middle East wars and the simmering feuds between the U.S. and China that are not easing, as well as Iran’s neighborhood forays and obsession to build nuclear weapons. Terrorism and 80 million migrants streaming across borders on six continents has also heightened homeland security investments. The common denominator is military dependency on electronic technologies.

Second, Rada makes products useful in all these conditions. Its revenue is skyrocketing on orders for its counter-UAV systems, the drone detection and surveillance system, short-range air defense and counter-fire systems. The latest Israel-Gaza conflict was all technology-driven with nary a rifle shot or boots on the ground crossing borders.

Rada CEO Dov Sella enthusiastically reported last month that “2021 was RADA’s best year ever with top line growth of 54%, higher margins across the board (41% up from 39% in Q4 ’20), and our adjusted Ebitda almost tripled….We expect strong revenue growth to continue…to organically reach ($140 million in Fiscal Year 2022) $250 million in three to four years (from a record $177 million in Fiscal Year 2021).”

The gross profit was 40.55% and the net income topped 21%. Earnings per share forecasts call for about a 15% increase in 2022 and 25% growth in 2023. The company ended the quarter holding nearly $80 million in cash and equivalents “and with absolutely no debt,” according to Sella.

The third positive for investors is Rada’s market cap is up to $656.56 million while the price-earnings ratio is down to 22.7. There is talk about a potential sale of the company. The board retained an investment bank, but the company has no comment in the meantime. Regardless, the stock deserves the very bullish rating it gets from this analyst and others. The few articles that appear about this small company are 100% bullish.

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Fourth, Rada's product innovations are increasingly important to Israel’s preparedness in thwarting existential threats. The company's growth adds to the nation’s economic success. The company’s prosperity creates jobs, international goodwill and exports that garner income from global trade. Sales are mostly in the U S. The Abraham Accords are opening markets to Rada. The company expects to do much more business with India.

Another positive factor is that institutions own 66% of the shares. This suggests Rada has gravitas among professional investors. Insiders own nearly 2%. The CEO owns possibly close to 1%. Insiders are also confident in the company’s operations and potential. Shares have a levered beta rating of 0.93, meaning the stock is less volatile than the stock market.

Downsides and risks

On the downside, there is scant if any public information about insider trading. The company does not pay a dividend and there is no talk about stock buybacks. Short interest moved up to 1.93%. The share price hovered at about $9 for a long time, then popped to over $13 in the last few weeks. Talk of a sale coupled with timely reports about strong financials may be the culprit. The share price might be ripe for a dip on no news. The Israeli government might pressure the stakeholders to not sell to a foreign-owned company; that might suppress any sale opportunities.

Takeaway

Rada Electronics is an essential industry. It carved a niche for itself with innovative products. Products are tested in real time and proven effective. The company contributes to Israel’s security economy and the relationship provides stability to the company place in the economy. Rada’s drone business is cutting-edge technology for which there are military, commercial and civilian markets. The company has high growth potential, is profitable with high margins and suffers few risks to its growth and share price. Any dip presents a buying opportunity for retail value investors.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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