2024-01-02 01:16:34 ET
Summary
- FEIM's H1 FY24 revenues rose by 51.4% compared to H1 FY23, driven by increased revenues from government satellite programs and non-space DOD customers.
- The company reported a net income of $2.8 million in H1 FY24, a positive sign after years of volatility in profitability.
- FEIM's stock price has been consolidating between $8 and $13 since 2011, with $13 acting as a strong resistance level. However, recent positive signs and volume build-up suggest potential for a trend change.
Frequency Electronics ( FEIM ) manufactures frequency control products for telecommunication stations. FEIM recently posted its results, and I will be analyzing its results. Its technical chart shows some strength, and the increased profitability is a positive sign. However, it would be interesting to see if it could maintain its profitability in the coming times. For now, I am assigning a hold rating on FEIM.
Financial Analysis
FEIM recently posted its H1 FY24 results . The revenues for H1 FY24 were $25.9 million, a rise of 51.4% compared to H1 FY23. The reason for the rise was an increase in revenues from the United States government satellite programs and non-space DOD customers. The revenues from the government satellite programs grew by 21.8% in H1 FY24 compared to H1 FY23. The revenues from the non-space DOD customers grew by 97.5% in H1 FY24 compared to H1 FY23. Its gross profit and margin both increased significantly in H1 FY24 compared to H1 FY23, and the major reason behind the increase was resolved technical challenges. It faced technical challenges in the previous year, so the resolved challenges led to the efficient running of programs.
It reported a net income of $2.8 million in H1 FY24 compared to a net loss of $5.4 million in H1 FY23. The company being profitable in the first half was a positive sign. If we look at its financials since 2014, we can see that it has been quite volatile in terms of profitability. It has reported losses in six financial years since 2014. So, I believe this volatility has been one of the major reasons behind the underperformance in the stock price of FEIM. Its current stock price is at the same level it was in 2014. However, if the management manages to be consistent with profitability, then it might positively affect its stock price. I believe there are tailwinds that will help it boost its sales growth. The recent upsurge in space activities across the world, especially in India, is making the competition intense across the globe. So, I believe that with growing competition, the space budget might continue to increase in the U.S., and the majority of its revenues might come from the U.S. government. So, the increasing satellite programs and aerospace activities will benefit FEIM. It has also won three orders worth $53 million by the end of H1 FY24. So, the demand it is experiencing is solid, but it will all come down to how it will execute its operations, and if they are successful in maintaining healthy margins, then we might see a turnaround in the stock price.
Technical Analysis
FEIM is trading at $10.9. The stock price of FEIM has been consolidating in the range of $8-$13 since 2011. The $13 level is acting as a strong resistance to the stock price. It has tried to break it several times in the past, but it has failed every single time. So, in my opinion, till the time the stock price doesn't break the $13 level, we won't see any upward rally in the stock. However, if we look closely at the price chart, there are some positive signs. In the last two months, the stock has moved up more than 40%, and the volumes in these months were the highest in the last twelve years. So it looks like buying momentum has been building up in the stock, and if the momentum continues, then we might see a trend change. So it would be interesting to see how the stock performs in the coming months. I would advise investors to keep an eye on this stock.
Should One Invest In FEIM?
The volume build-up and an upsurge in the stock price make it interesting. In addition, the results were solid, but I would wait for a couple more quarters before thinking about investing in it because it has been inconsistent with profitability. Hence, I would wait for a few more quarters to see if they are able to maintain healthy margins. In addition, the stock price is nearing an important resistance level of $13. Hence, I am assigning a hold rating on FEIM for now. It would be interesting to see how it performs in the coming quarters.
Risk
They primarily depend on U.S. government programs as prime contractors or subcontractors; in fiscal 2023 and 2022, these programs accounted for almost 95% and 94% of their sales, respectively. Due to shifting government priorities or other circumstances, some U.S. government projects may only receive partial or incremental funding and be subject to discontinuation, funding reductions, and/or delays. Their contracts, whether they are direct government contracts or contracts with prime contractors, are usually funded at a level below the entire contract value and necessitate recurring incremental additional money to be maintained. In the event that financial conditions alter and adequate money is no longer available, contracts may be terminated, materially postponed, or placed in stop-work status. Contracts with the U.S. government are governed by legislative financing, which could be unavailable owing to shifting priorities or continuing resolution, which could have an influence on their business through funding deletion or reduction. Additionally, the federal debt ceiling, the possibility of future budget cuts, the uncertainty surrounding the budget, and the possibility of U.S. government shutdowns might all have a negative impact on their business and the financing for their ongoing and future contracts.
Bottom Line
The results were solid, and the demand they are experiencing is solid. In addition, the volume build-up in the technical chart shows strength. However, for now, I am assigning a hold rating on FEIM because it has been inconsistent in being profitable. It would be interesting to see if it can maintain healthy margins in the coming quarters, and if it does, then we might see a turnaround in its share price.
For further details see:
Frequency Electronics: Increased Profitability Can Positively Affect Stock Price