8 min read

Aiming for 100% in 12 Months on this Drone Detection Pioneer!

It's a company in an extremely fast-growing industry - drones - yet is also consistently profitable (and whose stock is off its all-time highs and undervalued right now). In fact, I think it's set to rise 100% over the coming year.
Aiming for 100% in 12 Months on this Drone Detection Pioneer!
Photo by Gianluca Primon / Unsplash

August 4, 2021  
goodBUY Newsletter

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Lately, I’ve been re-reading an old Warren Buffett biography of mine.

It was written 25 years ago, titled Buffett: The Making of a Capitalist.

My version of the book, written by author and former WSJ reporter Roger Lowenstein, looks different.

It was sent to me by the publisher in 1995 for pre-publication review and comment (because I was a national business journalist at the time). The paper cover is worn, and some of the binding is starting to come apart.

But it remains a favorite investment book, which I highly recommend.

I suggest reading it not because it lionizes Buffett - but because the book often does the opposite.

Buffett, it’s clear, has made lots of mistakes - for instance buying airlines, retail department stores, and food companies that he thought would make great investments. Turns out that the companies, in many cases, were past their prime.

In other words, the risks that he took turned out to be bad risks.

Of course, when it comes to investing and speculating, making mistakes - losing money - is part of the game.

In my experience, it’s not so much the number of “wins” and “losses” that counts. It's the magnitude of the gains - making 100%, 200%, 300% and more - that really means the difference between success and failure.

More recently though, Buffett has admitted to mistakes that are really about risks not taken.

For instance in 2018, he told Berkshire-Hathaway shareholders that he was wrong not to have invested in tech companies like Google and Amazon (though he did eventually invest substantial amounts into Apple).

We can all sympathize. How many of us can tell more than a few stories about “the one that got away” because we didn’t understand the business, didn’t perceive it as cool at the time, or we just weren’t paying attention?

I try to learn from my own painful memories of ‘missed opportunities.”

In other words, I shoulda...woulda...coulda put some money into a promising stock.

But I “didna.”

So this month, I’m back with just such an idea I’m determined not to let slip away for the goodBUYs portfolio.

It's a company in an extremely fast-growing industry - drones - yet is also consistently profitable (and whose stock is off its all-time highs and undervalued right now).

In fact, I think it's set to rise 100% over the coming year.

Drone Technology: Promise, Problems...and Profitable Solutions

With every advancement in new technology, we experience lots of amazing benefits.

We’re beginning to see that with the use of drones - robotic aircraft of various types and sizes that can be flown by an operator on the ground, or increasingly - by themselves using onboard artificial intelligence.

Drone commercial deliveries are still mostly in the experimental stage - but non-profits are using these remotely-piloted planes to get medical supplies to remote villages in Africa.

Farmers use drones to precisely map their fields and identify the best growing zones for crops. Utilities use them to monitor their solar farms, pipelines, and networks of high-voltage power lines.

Unfortunately, drones are also useful to bad guys too.

Prisoners’ associates use drones to have drugs, cash and cellphones - jailhouse currency pretty much everywhere - “airdropped” into prison yards.

Think I’m kidding?

The Federal Bureau of Prisons said it recorded nearly 60 drone incursions in 2019 alone - up 50% from a year earlier. At one facility in New Jersey, wardens intercepted numerous drones attempting to drop contraband like marijuana, steroids, dozens of cell phones (as well as cell batteries and chargers), more than a hundred SIM cards, 35 drug syringes - and 2 metal saw blades.

And how can we forget drones that foul up commercial air traffic?

In the UK a few years ago, a persistent drone kept London’s Gatwick airport virtually shut down through almost the entire busy Christmas flight season.

And while we’re used to seeing news footage of US-operated drone aircraft - drones of many sizes are now a common battlefield weapon on all sides.

Most of us can barely spell Azerbaijan, much less find it on a map. But foreign observers credit the country’s prolific use of cheap drones to with turning the tide of battle in a recent border conflict with Armenia.

Likewise, in 2019 a coterie of drones successfully attacked a Saudi Arabian oil refinery, knocking it out of commission for a number of weeks.

Just a week ago, an armed drone carried out an attack on an oil tanker in the middle east - the latest of many such attacks in the Persan Gulf and Arabian Sea - killing 2 crewman in the process.

Fortunately, this month's addition to the goodBUYs portfolio provides a technology solution increasingly used by commercial companies and US-allied militaries.

Based in Israel, RADA Electronic Industries (RADA) has been a player in the field of defense avionics since its founding in 1970.

But early in the last decade, groups like Hamas began building large homemade drones in attempts to penetrate Israeli airspace. Later in the decade, ISIS and other terror groups began acquiring and modifying Chinese-built hobby drones for similar aims.

RADA executives recognized an opportunity in the making.

See, the hard part with almost any kind of drone - is “seeing” it on a radar system.

Traditional airport-style radar is blind to drones. The wavelength is too large. Small flying objects - drones, birds, swarms of flying insects - are invisible to such systems.

So the company’s engineers developed what’s now commonly called a tactical “multi mission hemispheric” radar (or MHR for short).

Think of up to 4 platter-sized “dishes”, mounted together like you see in the photo.

If you hook up the radar panels’ stream of data to a laptop computer - even the smallest drone becomes visible, easily monitored and tracked (and also distinguishable from birds).

In the process, RADA almost single-handedly created an entirely new kind of defensive technology purpose-built for the emerging “drone age” - SHORAD, or short-range air defense.

The Israel Defense Ministry was the first customer in 2015, the Pentagon a close second. Japan’s air ministry became the third.

These days, the systems are commonly mounted almost anywhere drones are a potential threat - from rooftops and farmers’ fields in Israel, to the bow of Marine Corps amphibious assault ships, and a widening array of fighting and reconnaissance vehicles.

Revenue & Profits

As a result, RADA’s sales numbers have been on a steady ramp higher for the past 4 years as military and defense customers keep adding more and more orders.

I think RADA’s numbers will continue rising on this trajectory for many years.

According to recent estimates, the drone defense system market - which means identification, detection and countermeasures - is growing at a compounded annual growth rate of more than 36%.

In 2020, researchers pegged the market’s size at $2.5 billion, but at the current pace, it will be a $16 billion market by 2026.

As many of you already know, what I like even better - in addition to sharply rising revenue numbers - is a company that’s either reporting consistently improving profits, or has a clearly demonstrated path to profitability.

After spending a lot over the past 2 years to ramp up production (not to mention COVID-related delays) RADA is beginning to hit the sweet spot of ongoing, sustainable profits.

So here’s the part where things get really interesting…

As you can see from the stock chart, RADA’s shares had a nice run last year - falling back in the early market-panic phase, but then soaring more than 500% to all-time highs at $14 set early this year.

Since hitting those all-time highs, the stock has been trading in a range between $14 and $11.

I’m betting the stock is consolidating here for a run to new highs up to $24 over the next 12 months.

Strong Growth, Undervalued Stock

Here’s how I arrived at that price target…

Analysts expect the company to earn $0.45 a share in profits this year, rising to $0.57 in 2022. By 2023, RADA should be on track to earn at least $0.68 a share.

Keep in mind, the stock is trading at a recent $12.

So if we divide the stock price by this year’s earnings projection (in other words $12 dividend by $0.45), we get a price/earnings ratio of 26.

That’s far too low of a p/e ratio for this company’s stock, in my opinion.

In my opinion, RADA’s stock deserves to have a premium value, with a p/e ratio closer to 40. Here’s why:

Remember, RADA does most of its business in the defense/security industry, where there’s steady sharply-rising demand across the board for its products - and will be for years to come.

Also, RADA doesn’t have to worry about losing customers or profitability due to important global economic factors like the possibility of sharply higher inflation.

The company’s profitability continues to improve as well as it expanded its large-scale manufacturing capabilities. Between 2017 and this year, RADA’s gross margins have risen from 31% to more than 39%.

A company’s gross margin trends and overall profitability are hugely important.

The higher a company’s gross margins, the more money it retains for profits and reinvestment back into the business (without having to borrow money from the bank, going into debt, or excessively diluting shareholders by selling more stock).

So my bet is that in coming months, Wall Street investors are going to assign a higher p/e ratio - upwards of a p/e of 40 - to owning the stock.

So if we take that p/e of 40 and multiply by 2022’s projected earnings per share of $0.57, we get a stock price of nearly $23.

But I happen to think RADA’s profits next year will likely be at least $0.60 or better...which gets us to a forecast stock price of $24.

Last Points…

A few days ago, RADA reported its latest quarterly numbers - generating higher-than-expected revenue of $28 million, and a profit of $0.20 a share for the period (compared to profits of $0.02 a share in the year-ago period).

You didn’t mis-read that. The company’s quarterly profit rose by 1,000%!

Yet it shows you how undervalued and underappreciated the stock proceeded to fall as much as 15% in the days after the earnings report.

I’ve seen these kinds of stock activities before. It’s typical for companies that aren’t on most investors’ radar at a particular moment.

That will change soon enough - which makes this an ideal time to put the stock in the goodBUYreport portfolio for projected gains of 100% over the next year!

Best of goodBUYs!