The Filtronic (LSE:FTC) share price exploded this morning as the penny stock surged by double-digits on the back of its latest results. As a result, since February 2022, the radio frequency communications technology business has seen its market capitalisation surge by more than 175%!
So what’s driving this explosive performance? And can these triple-digit gains repeat themselves? Let’s take a closer look.
New contracts breed new opportunities
In terms of revenue, Filtronic’s results weren’t anything to get overly excited about. After all, they grew by a modest 1.2%, from £8.4m to £8.5m. However, while sales growth was lacklustre, the cash generation improved drastically from a loss of £0.2m to a gain of £1.8m over the last year.
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Overall, the company is unprofitable. But seeing cash generation move into the black is an encouraging sight, especially for a penny stock.
A new contract with a leading low earth orbit (LEO) satellite company is set to add a further £3.4m to Filtronic’s top line. Meanwhile, the group is also working with BAE Systems in a £4.5m deal to develop and manufacture new radio frequency electronic modules. And pairing these with a recently announced £2m contract in January with QinetiQ, it’s no surprise that management expects its revenue and profits for 2024 and 2025 to be significantly ahead of expectations.
Needless to say, signing on FTSE 350 companies as customers is a monumental achievement for such a tiny enterprise. Apart from serving as a mark of legitimacy, success in these contracts could open the door to new and larger opportunities within the aerospace and maritime sectors. So much so that today’s market capitalisation of £55m could be just the tip of the iceberg.
The risk is still high
As impressive as the group’s series of contract wins have been, there remains a lot of work to be done. Filtronic’s surge in share price growth is largely driven by investor expectations and excitement. As such, the valuation is currently not supported by the firm’s underlying fundamentals.
Therefore, should something go wrong, even if it’s a short-term hiccup, such as a temporary delay, the shares could end up suffering a sharp downward correction. In fact, that’s precisely what happened with ITM Power – a firm that enjoyed quadruple-digit growth only to watch it evaporate a year later as it struggled with order fulfilment.
The company has a decent £4.1m chunk of cash & equivalents sitting on its balance sheet. That certainly provides some financial flexibility should it run into operational troubles. But ultimately, investors should prepare for volatility surrounding this business if performance doesn’t live up to the market’s ever-growing expectations for this enterprise.
Despite this, is now the right time for me to buy shares? Personally, I’m staying on the sidelines. There’s no denying the penny stock has made excellent progress. But with investors getting overly excited, the group’s valuation has got pretty lofty, even when taking into account the numerous contract wins over the last year.
