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Adding to a Holding on a Downdraft

We're nibbling on more RF Industries shares in the expectation of continued 5G network buildouts.
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After you receive this alert, we will buy 200 shares of RF Industries (RFIL) at or near $4.55. Following the trade, the portfolio will own 1,420 RFIL shares, roughly 3.2% of the portfolio’s assets. Ahead of RF Industries' April quarterly results we had concerns about the impact of the Covid-19 pandemic and related shutdowns on the company’s product shipments and whether they would be hobbled. As we saw, the company's April quarter revenue tumbled 24% year over year, which weighed on fixed-cost absorption and hit gross margins for the quarter. To be blunt, we suspected as much given similar comments from others in the digital infrastructure space that previously had reported their March quarter results. That point was hammered home by the company during its earnings conference call, when the management team shared that it is "the nature of our business that 70% of our team, our production and support staff, need to be physically onsite to build products.” Since then, RFIL shares have dropped roughly 26%, which is more than a classic correction and puts the shares meaningfully below our $5.85 cost basis. At the same time, we continue to see and hear more about the opening of the domestic economy and favorable comments surrounding continued 4G network capacity additions as well as the heating up of the 5G market.

AT&T (T) recently shared that it currently covers more than 160 million people in 327 markets today and it aims for nationwide 5G coverage this summer. The company also shared that by the end of 2020 it expects to have more than 15 5G-specific devices available. We suspect AT&T isn’t the only carrier building out its 5G network and adding incremental 4G network capacity coming out of the pandemic. This tells us 5G is poised to heat up further in the coming months, and in order to work those 5G devices users need a 5G network that is up, running and covering the country. Considering that RF Industries’ current quarter spans May through July it’s possible the first third to first half of the quarter still could be sluggish, but we suspect the momentum will continue to build throughout the quarter. Exiting April, the company’s balance sheet had $14.1 million in cash and little long-term liabilities, leaving it with more than $1.25 per share in cash. Backing out the cash, it means RFIL shares are trading at 8.5x expected 2021 earnings per share of $0.39 . Putting all of this together, we are going to use the sharp pullback in RFIL shares to add to our holdings but leave room for another bite at the RFIL apple in the coming weeks as others in the digital infrastructure arena report their June quarter results and update us on the industry environment.

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