When Humdrum Meets Huzzah!
No business is boring if it's making money, and the same can be said for stocks.
My firm has seen dull companies before, which is OK. We've done well in this area, and monotony is cited favorably by no less than Peter Lynch as a desirable investment attribute.
But RELM Wireless (RWC) raised the boredom bar when, in its latest 10-K, it articulated four reasons why its market -- land mobile radios (or LMR) -- is cold: it's a mature industry, many customers are in mature industries, public sector customers are hampered by budgetary constraints, and there's a shortage of available radio frequency spectrum.
LMR is familiar to many as walkie-talkies or larger devices for use in vehicles. Compared to cellphones, LMR is characterized by higher frequency of use over much shorter durations (say, 30 seconds). They're appealing for internal organizational communication in that there are no variable line charges.
But boredom notwithstanding, the stock jumped 56% on March 28, and has held onto its newly elevated trading range!
Actually, boredom is in the eye of the beholder. As dull as RELM Wireless may have seemed to Wall Street, things have been jumping for awhile inside the firm. Research & Development in the mid-2000s was about 10% of sales, but from 2008 through 2011, it came in at 23.6%, 25.5%, 37.4%, and 18.2%.
To get a sense of what insiders have been doing, let's go back to the fourth reason for slow growth: shortage of radio spectrum, something to which the FCC responded by pushing LMR to digital technology. That in and of itself is not necessarily a big game changer. But the way some LMR manufacturers (including RELM Wireless) are implementing it, P-25, is looking like it will have a huge impact.
P-25 is a standard developed among LMR manufacturers, including RELM Wireless, at the behest of the Association of Public Safety Communications Officials, key aspects of which are meeting the FCC spectrum mandate, doing so with maximum efficiency, promoting open architecture for LMR, and allowing for interoperability (communication between equipment from different manufacturers).
In LMR, Motorola Solutions (MSI) is the big gorilla; RELM Wireless and others are small fries. Hence P-25 could be huge in that its adoption would prevent Motorola from effectively locking out small rivals. It seems reasonable to assume, therefore, that making P-25 a reality would seem a long shot, given that the FCC has not formally adopted the standard; it's not as if Motorola has incentive to rush into the vanguard.
But customers, for whom interoperability and the competition it fosters is desirable, may see things differently. And on March 28, a big-gorilla customer, the US Department of Homeland Security, came down for P-25.
The agency announced a $3 billion two-year Tactical Communications contract (to be followed by three one-year options) for procurement of P-25 compliant two-way radios and related equipment by all its agencies and several others, such as Justice, State, Interior, and the White House Communications Agency. RELM Wireless is one of three firms included among those that will get work under a portion of the contract designated for small businesses.
It's too early to quantify how much business RELM Wireless will get. But considering that RELM Wireless did only $24.1 million in revenues last year, and that it is one of the main proponents of the P-25 standard endorsed by Homeland Security, it's easy to assume RELM Wireless will come away with enough to be very significant for a company its size.
The company is debt free and its stock, even after the surge, trades at just 0.9 times trailing 12-month sales (compared to P/S ratios of 1.62, 3.33, and 2.39 in 2006, 2007, and 2008, respectively).
With P-25 now ensconced, commercially if not legally, and with the Homeland Security feather in its cap, RELM Wireless can compete for additional business in ways it never before could. RELM Wireless is a Buy.
Editor's Note: This article was written by Marc Gerstein of Forbes Low-Priced Stock Report.
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