The defense sector has underperformed over the last year. Lockheed Martin (LMT) gained around 12% during this period while Northrop Grumman (NOC) is up around 4.6%.
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However, there is an exception.
Rada Electronic Industries (RADA), a small-cap defense technology company, is a dark horse and has surged 327% over the past year. Rada provides tactical radar solutions, advanced airborne avionics systems, and surveillance infrastructure to companies that include Lockheed Martin, Boeing (BA) and Rafael.
Strong Revenue Growth Visibility
Over the last few years, Rada has been on a strong growth trajectory. In FY2019, the company reported revenue growth of 58%. Last year, top-line growth accelerated to 72%, with the company reporting revenue of $76.2 million.
Rada has guided for more than 70% revenue growth in the current year, so given this performance, it’s not surprising that RADA stock has surged.
An important point to note is that the company’s order backlog has continued to accelerate. For FY2020, Rada received $102 million in new orders compared to $60 million for FY2019.
Furthermore, the company’s order intake was $15 million in the first two months of this year, 150% higher compared to the same period last year. Even if the company’s order intake for the full-year is only 100% higher on a year-over-year basis, Rada is positioned to report $200 million worth of new orders in FY2021.
Rada’s software-defined tactical radars have contributed significantly to the inflow of orders and the company believes that the tactical radar market is worth $5 billion.
Assuming Rada can capture 10% of the market share, the company is positioned to increase its top-line to at least $500 million in the coming years. As the total addressable market keeps growing, so too will its potential revenue.
The company’s top-line growth has also translated to a strong improvement in EBITDA. For FY2019, Rada reported EBITDA of $0.4 million, which swelled to $9.7 million in FY2020. Strong growth in EBITDA is likely for the current year coupled with an increase in operating cash flows.
Another important point from a financial perspective is that Rada completed a common share offering in March 2021, which resulted in net proceeds of $59.5 million. The timing of the public offering suggests that Rada is gearing up for its next phase of expansion.
Global Growth Opportunity
Rada Electronics already has a U.S. subsidiary that produces and delivers to the company’s biggest market. However, another key trigger for growth is a global expansion.
In its latest annual report, Rada indicated that “two major European air defense integrators have purchased radars for integration and testing.”
The company already provides digital recorders and debriefing solutions to the Chilean Air Force as well as to the Indian Air Force in collaboration with Hindustan Aeronautics.
It’s important to mention that most of the NATO allies are still short of their defense spending targets. With the likelihood that defense budgets will increase over the next few years, Rada seems well positioned to benefit.
Wall Street Opinions
Analysts on Wall Street are bullish on RADA stock, giving it a Strong Buy consensus rating based on 4 unanimous Buy recommendations. The average analyst price target of $17 per share implies that the stock has upside potential of around 30% from current levels over the next 12 months. (See Rada Electronics stock analysis on TipRanks)
Concluding Views
Rada also seems keen on expanding its business segments with the company and recently signed a letter of intent (LOI) to invest $3 million for a 12% stake in RADSee Technologies.
RADSee develops advanced radar technology and is targeting the commercial vehicle market. In February 2021, the company announced its first 4D imaging radar for autonomous vehicles. The investment seems attractive and could create long-term value.
Overall, Rada Electronics is a growing player in the defense industry and the company is winning some big clients. If order backlog growth remains robust, RADA could potentially continue its upward trend.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
