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Frequency Electronics - Synchronizing Time



October 03, 2010 – Comments (0) | RELATED TICKERS: FEIM , NOC , MSI

A research client of ours is a member of the American Association of Individual Investors, an organization that we have been associated with off and on as individual investors, since the mid 1990s.

Several days ago we received an e-mail from our client asking us for a Raw Value worksheet for Frequency Electronics, Inc., (Nasdaq: FEIM). In the e-mail, they explained that they had run across the company using a screen on the AAII site.

We did some checking, and while we did have the company on our watch list, we had never taken the time to create a valuation worksheet.

As we have said on many occasions, we like companies that make stuff, that companies that make stuff, need, picks and shovels companies we like to call them.

The only companies we like better than picks and shovels companies, are picks and shovels companies that have the government as one of their customers, or whose customers have the government as one of their customers.

And considering a recent article we saw on the Yahoo Finance site, we think companies that do business with the government, may just come back into vogue.

The questions we took away from the Yahoo article were several. The first thing we wondered was will the Dow actually fall to 4200 over the next 9 months? That is an extremely precipitous plunge.

The next thing we wondered was will the real unemployment rate (U6) really hit 24%, and finally will housing prices indeed fall an additional 20%?

Not that there is any real basis for these prognostications, but we had to wonder, what if? 


Financial information presented in this report for Frequency Electronics, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending April 20, 2010, as filed with the Securities and Exchange Commission on July 29, 2010. 

What They Do 

Frequency Electronics, Inc. was founded in 1961 as a research and development time and frequency control company and was incorporated in Delaware in 1968.

In the mid-1990’s, the company changed its business model from primarily a defense contract manufacturer into a high-tech provider of precision time and frequency products for commercial applications found in both ground-based communication stations and on-board satellites, with supporting services to the United States government for defense and space application products.

The company has become a world leader in the design, development and manufacture of high-technology frequency, timing and synchronization products for satellite and terrestrial voice, video and data telecommunications.

Their technologies provide solutions that are essential building blocks for the next generations of broadband wireless and for the ongoing expansion of existing wireless and wireline networks.

The company has stated that their mission is to provide the most advanced control of frequency and time, which are essential factors for synchronizing communication networks and for providing reference frequencies for certain military, commercial and scientific, terrestrial and space applications. 

Short-Term Investment 

The stock closed recently at $6.06, with Resistance at $6.68, a 10% increase from a recent close, and Support at $5.38, an 11% decline from a recent close.

The stock has been in a downtrend which started in early May, with the stock price literally drawing a straight line since about the later part of May and continuing through a recent close.

Obviously we are not the greatest readers of the tea leaves, but it just seems to us that short-term investors may want to pass on this stock, at least until the cow jumps over the moon. 

Long-Term (5 Year Hold) Investment 

Based on our review of the company’s FY10 financial information, we found the Current Ratio, the Quick Ratio, and the Cash Ratio, all far in excess of what we consider investment quality. We also found the company’s debt at $0.07 per share, to be acceptable.

What we did not find to our liking was the company’s Return on Invested Capital at about 8%, and the company’s Cash Conversion Cycle at 387 days, meaning it takes the company 387 days to produce a product from its inventory and then collect the money for the product it made.

We also were not fans of the interest free loans the company appears to be providing to its suppliers, which is what happens when suppliers are paid on average every 21 days, but the company is paid on average every 78 days.

Certainly we recognize that with Northrop Grumman Corporation (NYSE: NOC), Lockheed Martin Corporation (NYSE: LMT), Motorola Corporation (NYSE: MOT), and Boeing Corporation (NYSE: BA) being the company’s major customers, collecting Accounts Receivables may take a bit longer than collecting from lesser companies.

But we believe that the role of management is to be proactive and as such, they should put in place policies and procedures that would improve the company’s collection process. 


Based on our review of the FY10 financial information for Frequency Electronics, our Reasonable Value Estimate for the stock is $27, with a Buy Target of $16.50, a First Sell Target of $32, and a Close Target of $34. 

Final Thoughts 

Like the article we read, we believe there is a tremendous amount of economic uncertainty, not only in the American economy, but in the world economy as well.

The Obama Administration has spent vast sums attempting to keep the markets artificially propped up, and while investor optimism continues to contribute to what we feel are extremely high valuations, we also believe that investors are starting to see that the end of the current market run is at hand.

Unemployment continues to linger at near 10%, corporate profits, while beating reduced expectations are simply not as good as analysts would have investors believe, and little seems to be improving when it comes to corporate sales.

To us, there is simply nothing tangible that bodes well for adding equities to ones portfolio at the present time. That is unless they can be added at a sizable discount to their fair value.

But most investors are simply not willing to take the time required to determine what to them is a fair value for a stock, taking the mindless recommendations of the analysts instead.

At Wax Ink, we continue to believe that the house of cards that has become Wall Street is near collapse, and that a great number of individual investors will once again be left with nothing more than memories.


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