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RF Industries Ltd.
RFIL Industry Opinion

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By TechSalesJeremy
July 18, 2005

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RFIL Industry Opinion

I chose to write up my view on RFIL mainly because of the Lynch principle of "buying what you know". I'll admit, I haven't used these products specifically. But I am familiar with the type of product they sell. I am about 3/4 of the way through "One Up On Wall Street" and I'm trying to use what I've learned to evaluate this stock's opportunity.

I think I'm going to branch this out into a few different posts to cover each angle I'm looking at it from. Below is the argument for this being a lucrative and growing segment to be a part of.

If you're curious about my ability to have anything useful to say on the subject please check out a previous post of mine [Hidden Gems subscription required] that will help you make an educated decision (for better or worse):

As for what I'm doing now (Employment, I used to work for a national computer sales company) I work at what we call a VAR (Value Added Reseller). The company I work for is a small ten person shop, we buy and sell computer equipment but we also service computers, help maintain our customer's networks, build custom applications, help with virus removal and just about anything else you could imagine could do with technology needs/problems of a small business.

How does that qualify me to have any insight to the products RFIL produces? I'm sure it doesn't make me an expert but we use the same products that the wireless division is touting for growth. The thing about the ends (connectors) that make this not a commodity is that it seems like just about every antenna manufacturer has a different connector they use for getting the signal to the antenna. Because of this the market for the custom cable and connector will continue to be large and (I believe) evolving enough to make this a market that will not be flooded with competition dragging down the profitability of the companies who produce the product. Coaxial connector is one thing; this market is entirely something else as far as potential goes.

My real world experience is that these cables look like 5-10 times thicker coaxial cable (the cable that you use for cable TV, the older style cable you screw on with one thread in the middle). Sure they have a special connector but they really don't look like anything special. They retail for anywhere between $60-$100. You could find Coaxial cable the same length for $10-$15 bucks. Also keep in mind that the cable is an afterthought in most of the purchases for wireless transmission. People first do a site survey to figure out what kind of thing they need, then they pick out a power and style of antenna, then they remember they need the cable and get it. I imagine the same mentality comes into play with the people selling the equipment. First is the service cost, then the signal, then the cable, which is the lowest cost by far in the project at large. I imagine this allows them to sell at higher prices because it is an overlooked product, but I could be wrong.

The second argument is simple; the market for the wireless stuff is accelerating quickly. We see it all the time. The reason? It's primarily two things from what I've seen, money and lack of other choices. Let me explain:

Money- The new age of wireless connection devices allow you to transmit wirelessly your data network, or just Internet connection if you want, from a few hundred feet up to (In my experience) 15 miles. In theory it's simple, you point the two antennas at each other, adjusting until they are bouncing signals off of each other. Obviously there's a lot more to it than that but that's the idea. This saves businesses, schools, and just about anyone else having a lot of computers and having multiple sites from having to lease another line from the local telephone company for data to these remote locations. If you were to lease another line, they charge you a significant rate (For a T1 line [Lots of DATA] you are looking at hundreds of dollars a month).

If you could share the data line you already have going with another site, after the initial investment it's free. So it makes sense for a lot of people. The only other option than doing this is to run fiber (strands that are encased in protective casing (a cable enclosure) that transmit beams of light to send information farther than conventional cable) between your locations. Sometimes this works if the sites are within a few hundred feet of each other. But think of it in terms of digging a trench a mile long and burying cable in it, and you'll see it's not really a cost effective way of doing things in most cases.

Okay so that's my understanding of the industry and angle they have.

For those who have not read the most recent (year end 2004) 10-K I found some interesting stuff.

The largest percentage of product they sell is connectors. This is pretty straightforward stuff. But what a lot of us considering investing in the company do not know is that it is a business with a "Moat" to it, if only a small one. Let me give it to you straight from the horse's mouth. For those who would like to read the whole thing here's a link to the company's 10-K for year end 2004.

If not here is a paragraph I found to be really interesting:

Connector Division: The Connector Division is engaged in the design, manufacture and distribution of coaxial connector solutions for companies that design, build, operate, maintain and use wireless voice, data, messaging, and location tracking systems. Coaxial connector products consist primarily of connectors which, when attached to a coaxial cable, facilitate the transmission of analog and digital signals in various frequencies. Although most of the connectors are designed to fit standard products, the Company also sells custom connectors specifically designed and manufactured to suit its customers' requirements such as the Wi-Fi and broadband wireless markets. The Company's RF connectors are used in thousands of different devices, products and types of equipment. While the models and types of devices, products and equipment may change from year to year, the demand for the types of connectors used in such products and offered by the Company does not fluctuate with the changes in the end product incorporating the connectors. In addition, since the Company's standard connectors can be used in a number of different products and devices, the discontinuation of one product does not make the Company's connectors obsolete. Accordingly, most connectors carried by the Company can be marketed for a number of years and are only gradually phased out. Furthermore, because the Company's connector products are not dependent on any line of products or any market segment, the Company's overall sales of connectors do not fluctuate materially when there are changes to any product line or market segment. Sales of the Company's connector products are more dependent upon the overall economy and on the Company's ability to market its products. The Company's sales of connectors and cable assemblies have increased in the past two years as the overall market demand for wireless products that use the Company's connectors has increased. The Company believes that the continuing growth in new wireless products as well as its increased sales in the military/aerospace markets will result in an overall increase in the demand for the radio frequency connectors and cable assemblies that the Company distributes.
OK here's my comments on a few lines I thought were important:

"The Company's RF connectors are used in thousands of different devices, products and types of equipment. While the models and types of devices, products and equipment may change from year to year, the demand for the types of connectors used in such products and offered by the Company does not fluctuate with the changes in the end product incorporating the connectors"

I know this is basic, but it's important. It doesn't matter what kind of connector is in style! These guys are not dependent on the connector. When something changes in the industry their customers won't go elsewhere, they'll just wait for them to convert to the new connector and start buying that. They aren't at risk of being obsolete.

"In addition, since the Company's standard connectors can be used in a number of different products and devices, the discontinuation of one product does not make the Company's connectors obsolete. Accordingly, most connectors carried by the Company can be marketed for a number of years and are only gradually phased out."

I guess this piggybacks on what I just said but for those not in the industry they might not catch on. These cables, even when something new comes out are still going to be needed. The reason is that many people will still be using the old style, either replacing cables, ordering longer cables, keeping replacements in stock etc., so there will still be demand. They don't have the risk of grinding to a halt one day just because something new came out.

There's obviously a lot more to the 10-K, and it's worth reading if you are interested in the company. I may post some more thoughts but I think this is where my expertise ends. I'll write up an argument from a numbers standpoint soon.

As a postscript please know that the reason for me writing this is not to flail my knowledge of the industry around, but to hopefully start a good conversation from different angles and perspectives about the company. If you have questions about what I wrote please let me know and I'll answer them. But what I'd really like to see is some give and take on the company. The good and the bad with this company is how small it is, and I believe that makes our opinion that much more important. Any insight you personally have about the stock would be greatly appreciated.

I'll have part two either talking more about the company (when I have the chance to finish reading the 10-K) or if I don't think I have anything useful to add I'll take a look at the numbers the best I can.

Please give your own feedback and insight.

Jeremy


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