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Investment pro Steve Mittel, general partner at Nob Hill Capital Management, in San Francisco, likes to find "market orphans" -- companies whose shares have no sponsorship on the Street but make important products and have rapid earnings growth since 1998.
One such discovery is Frequency Electronics (FEI), which is a strong player in technology used in both commercial and government applications. The company designs and makes precision time- and frequency-control products used to synchronize voice, data, and video transmissions in commercial satellites. Frquency Electronics is also a defense contractor (its original core business), providing products mainly for navigation, surveillance and counter-measure, and timing systems that the U.S. government uses in military aircraft, missiles, and satellites.
Despite its lack of Street sponsorship, Frequency shares haven't been asleep. Like other tech stocks, it was hammered in mid-March, when it was at 28. But Frequency has quickly snapped back and nearly recovered all of its loss. It's currently trading at 24.
BIG-NAME CLIENTS.
"The stock is dirt, dirt cheap, for a company operating in one of the hottest growth segments of technology -- wireless data transmission," argues Morgan Frank of Hollis Capital Investment in San Francisco. He thinks that in a year, the stock could leap to 80, based just on backlog orders and the accelerating demand for its products.
Frank notes that the big names in the burgeoning wireless business are among Frequency's customers, including Motorola, Lucent, and Ericcson. It's also negotiating to get business from large companies in Japan and Europe, he adds.
Frequency has a "spectacular balance sheet, for a company its size," says Frank, who points out that it has cash and cash equivalents of $60 million, with practically no debt.
VALUE PLAY.
"For a stock whose annual earnings rates have grown at a fast clip since 1998, you're getting both a cheap growth stock and an undervalued value stock," says Frank. He concedes that the company may not be able to sustain such rapid growth. But Frequency's management is "top-rate" and is very focused on taking the company toward much higher growth levels, says Frank. He puts the company's "enterprise, or intrinsic worth" at 85 to 90 a share, thus making it a decent value play.
Frequency is also said to have attracted potential suitors because of its undervaluation. "This company will be gone in less than a year," says one New York investment manager who has been scooping up shares. He says Frequency would be an attractive target for the likes of General Motors' Hughes Electronics, Germany's Siemens, or certain Japanese technology companies. CEO Martin Bloch couldn't be reached for comment, as he was preparing to post fiscal fourth-quarter and yearly results this afternoon.
The company is expected to beat consensus estimates for both the fiscal fourth quarter and all of fiscal 2000 ended Apr. 30. Nob Hill's Mittel estimates that Frequency will earn 55 to 60 cents a share in fiscal 2001, on revenues of $58 million.
SNUBBED.
So why has the Street ignored the company? One reason is Frequency's current market cap of $189 million, which isn't large enough for the big guns like Goldman Sachs or Merrill Lynch. Another reason is the past instability of revenues and earnings because of asset sales and some acquisitions. More important, Frequency doesn't seem to be looking to raise more capital, which is the main motivation for any investment firm's analysts to cover the stock. The last time Frequency went to market to raise capital was 1981, when Bear Stearns offered the public 340,000 shares.
Says an investment banker at one of the Street's major houses, who met with Frequency's top management: "We like their products and market potential and what they are doing, but they are too small for us to cover them. We probably should, really."
Gene Marcial is Business Week's Inside Wall Street columnist
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