ORBIT/FR: An Attractive Play on Wireless Growth

| About: ORBIT/FR Inc. (ORFR)

ORBIT/FR Inc. (OTCPK:ORFR) seems to offer a rather uncommon opportunity to buy what looks like a NASDAQ technology stock at prices that more closely resemble those of a Chinese pink sheet scam.

The company provides automated microwave test equipment to the defense, telecom, satellite and automotive industries with defense being a particularly strong area. Customers include a laundry list of household names, including Lockheed (NYSE:LMT), Boeing (NYSE:BA), Motorola (MOT), and AT&T (NYSE:T), as well as the US government. The company is further divided into two logical divisions with Orbit providing microwave testing solutions and AEMI providing anechoic foam used in microwave test systems. As a rule, Orbit offers the higher margins of the two businesses.

To provide a bit of history on the company, Orbit was originally a division of Orbit-Alchut Technologies. Orbit-Alchut sold all of their shares of Orbit to Satimo in May of 2008. In June of 2009 Satimo's parent company, Microwave Vision Group, organized both Orbit and Satimo under a single corporate entity. Orbit, while considered a subsidiary of MVG, remains an independent public company. The strategy employed by MVG is to share the administrative burden between the Orbit and Satimo thereby reducing costs while improving the breadth of offerings and leveraging cross selling opportunities between the two organizations. As an example, Satimo is now selling materials from AEMI while they were previously selling similar products from AEMI's competitors.

The strategy seems to be working quite well, so far. When Satimo took over in May of 2008, the company lost 1.6 million dollars on 5.3 million dollars in revenue. In the most recent quarter Orbit made 1 million dollars, or .16/share on 9.1 million dollars in revenue. The most recent quarter did include a one time inventory adjustment and a small tax benefit. If those are netted out the company would have earned .21 a share.

Financially the company is on solid footing with .50 a share in cash on the balance sheet and no long term debt. Their earnings over the last 3 quarters excluding the previously mentioned one time charges and a tax benefit in Q4 of 2009 now total .41 a share. Based on YTD results, EV/Ebitda sits at 6.1, PE at 7, and FCF yield is 15%. Not bad numbers for a technology stock trading at 3.00 a share.

Of course, recent results matter a lot more if you expect them to continue and there is reason to believe we should continue to see some strength at least in the foreseeable future.

First, the company began the year with a 25.2 million dollar backlog versus 18.2 million at the beginning of 2009. In 2009 the company produced 31 million dollars in revenue from that backlog. Thus far they have produced 16.5 million dollars or 6% more revenue from a backlog that started 38% higher. This should imply that we see stronger backlog conversion in the second half, and, indeed, historically this is the case. Over the past 3 years revenues in the second half of the year have been 20% higher than in the first half. Should that trend continue they would average roughly 10 million dollars in revenue in each of their last 2 quarters, well above the 9.1 million that produced a normalized EPS of .21 a share last quarter.

Second, the company is signaling that it expects results to be quite strong. Parent company MVG recently put out a press release in French that (thanks to the magic of the Google translator) indicates that the company as a whole is expecting to see accelerating results the remainder of the year. It is important to keep in mind that Satimo is roughly a third of overall revenue so there is not a linear match between the parent company and ORFR, but accelerating growth at the parent sure seems positive for a subsidiary that provides most of their revenue.

Third, in addition to the huge end of year backlog, the company has announced another 24 million dollars in orders so far this year. Some of those orders were announced in January so a portion of them may have been initiated in 2009 but the later months of the year tend to be the company’s strong period for orders. The fact that they have already announced orders almost equal to last year’s backlog implies that not only should 2010 look great but 2011 may as well.

Finally, the bigger picture looks good; with the ubiquitous and growing nature of wireless technology touching more and more aspects of our lives, the demand for test equipment should follow suit. Agilent (NYSE:A), who is an ORFR partner, is also suggesting strong near term growth for its wireless equipment with moderated growth looking further out.

There are always caveats with any company, and actual results will depend on all of the usual factors including their ability to maintain margins, control SGA spend, avoid cost overruns on projects etc. I also expect them to start recognizing more normalized tax expenses by Q4 of this year, so that has to be factored in as well, but given the recent earnings and outlook I think this looks quite compelling at 3.00 a share and could have considerable upside as they convert that backlog into earnings. If they manage to match or top last quarter’s .16 in EPS, they will have topped .16 in eps 3 of the last 4 quarters. It’s hard to believe that developing performance like that could be ignored for long.

Disclosure: Author is long ORFR