I believe RELM Wireless Corp. (RWC) offers a tremendous risk/reward as we head into 2013.  The market capitalization hardly even qualifies as a microcap at about $23 million, with average daily volume of about $25,000, or 15,000 shares.  However, if the company continues to gain traction and delivers on the opportunities it faces, I think this could be a great momentum stock in 2013, and I can envision seeing the stock with a $7 handle.  Yes, I can build a case where this company is worth close to $100 million, or $7, in the next twelve months.

RELM engages in the design, manufacture, and marketing of wireless communications products in the United States and internationally. Its products include two-way land mobile radios, repeaters, base stations, and related components and subsystems.  Importantly, the company competes against Motorola Solutions ($MSI), the industry giant in the land mobile radio industry.  MSI controls the lion’s share of the $9 billion market for radios and infrastructure equipment.  In order to be successful, RELM simply needs to find additional customers who will consider suppliers beyond Motorola Solutions and a handful of other big companies that compete in the industry.

The abbreviated investment case for RELM is as follows: RWC has a book value of $2.18.  Gross margins are turning higher as the company’s digital radio products gain more traction.  The sales cycle is very long, but the company’s list of “substantial” customers is growing, and repeat business (follow on orders) is common.  Beyond the migration to digital radios, RELM is expanding its market opportunity by providing products beyond its traditional VHF frequency focus.  Trunked radio system sales are also expanding RELM’s estimated market opportunity.  The company is expected to see revenue of around $27 million this year, with EPS of around $0.14 per share.  Looking out to 2014, RELM could achieve revenue of perhaps $40 million, with gross margins approaching 60% and operating margins of around 20%.  EPS could be between $0.35-$0.40 per share.  Assuming the business holds steady at these levels, a discounted cash flow model yields an expected stock price of around $7.

Risks to the RELM story include the fact that cash-strapped cities, municipalities, state and Federal Government agencies account for most of RELM’s customers.  The sales cycle is long, and RELM has to work even harder as a tiny company to convince potential customers that it will deliver for them.  There are many suppliers with whom RELM competes, most of whom are larger  than RELM and possess greater financial resources.

January seasonality has been big for this company.  If you can deal with a stock that only trades 15,000 shares a day, take a look at this name.  I first bought RWC in August, 2012 and continue to hold the shares.

For 2012, I profiled FSI International as my top pick.

http://ibankcoin.com/fastprophet4u/?p=6

I had a price target of $5.80, up 50% from the beginning of the year.  It was a bumpy ride, but in October of this year, the company was acquired for $6.20 in cash.

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