Frequency Electronics Thriving In The Paradigm Shift In The Satellite Industry

Frequency Electronics (NASDAQ:FEIM) designs, develops and manufactures precision time and frequency generation technology for satellites and terrestrial secure communication, command, and control. The majority of revenue is derived from U.S. government contracts.

As described in my earlier articles (1, 2), the company is the world leader in precision time and frequency generation technology. The satellite industry is undergoing a paradigm shift, and Frequency is successfully leveraging its technological superiority while adapting to this changing industry.

Paradigm Shift

Dr. Tom McClellan was hired as Frequency’s new CEO in 2022, just as the stock price hit a new low. The stock price has been on an upswing since. The company thrives due to the increasing demand for satellites in traditional and new market conditions.

Dr. McClellan led the company to a more customer-centric business model to address a new development in demand, as he explained during the 2024 Q4 earnings call:

And so in particular in the space business, there’s this move to smaller, cheaper satellites. And sometimes that means that people are figuring out ways to perform the same tasks with hardware that doesn’t perform as well but is lower cost. In particular, what we see in the satellites is that instead of something designed to operate within requirements for 15 years, the goal is for it to operate within those requirements or maybe even relax requirements for only three years. And so this is a new kind of business for us.

SpaceX’s (SPACE) Starlink is a perfect example of the paradigm shift in the satellite industry. Starlink will have 42K satellites in orbit. These will be small, cheap satellites with three to five years of life expectancy. Placing multiple satellites allows enterprises to adjust to satellite breakdowns without replacing each broken-down satellite. Satellites with shorter life spans also result in satellites in orbit being equipped with later technological advances.

Traditional Demand Remains Intact

Precise timing is essential for spacecraft traveling at light speeds. A deviation as small as one one-thousandth of a second alters a route by almost 200 miles. Demand for high-quality precision timing devices will always be necessary, even if they are omitted from onboard the new small satellites. The larger satellites equipped with precision timing devices can be deployed to communicate and navigate a small satellite network.

Frequency has provided precision timing devices for almost every NASA mission and continues to enjoy its position in the industry, as Dr McClelland cited in the recent earnings call.

I think that, one of the things we really pride ourselves on is that we have technologies and capabilities to provide really high precision products that nobody else can provide. In those cases, we really don’t have any competition. So, many of the traditional satellite programs, when they require the absolute best phase noise and performance requirements of this sort, they come to Frequency Electronics.

Financial

The last reported cash balance is $18.3M, and the debt is $6.19M. There are 9.5M shares outstanding, and the market cap is $119M.

Revenue for fiscal 2024, reported in July, was $55.3M, 36% higher compared to $40.8M the prior year. Fiscal 2025 is shaping up to be even better as the company reported a record backlog of $78 million, compared to $57M at the end of the prior year.

The market values the stock at a PS ratio of 2.07, lower than the peer group median of 2.85. The hefty backlog implies that the company can continue growing revenues by at least 36%, resulting in fiscal 2025 revenue of $75.21M million and a share price of $22.57, almost double the current market price when applying the peer group median PS.

• 2024 rev. $55.3M X 36% growth rate= $19.91M revenue increase
• $19.91M + $55.3M=$75.21M estimated 2025 revenue
• $75.21M/9.5M shares= $7.91 revenue per share
• $7.91 x 2.85 = $22.57 per share target price

The stock should command a higher valuation due to its considerably higher revenue growth rate of 35.55% compared to the peer group median of 3.17%.

Risks

The company is tackling challenges in the evolving satellite industry. Demand for smaller satellites is a push to lower costs, which could result in lower margins for Frequency.

Most revenue is derived from U.S. government agencies, often resulting in lumpiness due to delays in appropriations and changes in funding allocations.

The company competes with larger companies with more significant resources, such as Microchip Technology (MCHP) and Thermo Fisher (TMO).

Conclusion

Frequency Electronics is enjoying its position as an industry leader and the tailwind of increasing satellite demand. It reports increasing revenues and profitability. The record-reported backlog points to continued success. The stock trades at a discount to its peer group and should rerate as it grows.