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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it currently lacks a track record of revenue and profit. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Frequency Electronics (NASDAQ:FEIM). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
See our latest analysis for Frequency Electronics
Frequency Electronics' Improving Profits
Frequency Electronics has undergone a massive growth in earnings per share over the last three years. So much so that this three year growth rate wouldn't be a fair assessment of the company's future. Thus, it makes sense to focus on more recent growth rates, instead. In impressive fashion, Frequency Electronics' EPS grew from US$0.30 to US$0.82, over the previous 12 months. It's a rarity to see 176% year-on-year growth like that.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. The music to the ears of Frequency Electronics shareholders is that EBIT margins have grown from 7.5% to 12% in the last 12 months and revenues are on an upwards trend as well. That's great to see, on both counts.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Since Frequency Electronics is no giant, with a market capitalisation of US$165m, you should definitely check its cash and debt before getting too excited about its prospects.
Are Frequency Electronics Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. Because often, the purchase of stock is a sign that the buyer views it as undervalued. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
It's nice to see that there have been no reports of any insiders selling shares in Frequency Electronics in the previous 12 months. With that in mind, it's heartening that Russell Sarachek, the Independent Director of the company, paid US$28k for shares at around US$9.57 each. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.