BK Technologies (BKTI)

Disclaimer

BKTI is a microcap and is best suited for small funds and PAs. 

Short pitch

BK Technologies sells radios to the government. There are roughly 700,000 radios sold every year of which almost 500,000 are sold by Motorola. 25,000 radios of the 700,000 are sold to agencies that fight wildfires. This niche was historically dominated by BK and it was a nice little business that lost and made money from year to year depending on radio replacement cycles. In 2023 they introduced a new higher margin product, with which they are hoping to steal market share from Motorola, and switched to a contract manufacturing model to further improve margins. Thesis is simple - increased revenues at better margins will result in better earnings which will drive the share price increase.  

Why does this opportunity exist?

●       This is a historically boring low-margin device business which had some cyclicality.

●       Market for the company was just limited by agencies that work with wildfires. Revenue growth was not in the cards.

●       BKR 9000 rollout with a promise of new revenue growth avenue took much longer than expected and some investors got tired.

●       This is a microcap.

 Valuation

SP - $23.5
SO - 3.6m
Equity - $84.6m

Cash - $3m
Credit facility - $3.7m

EV - $85.7m 

LTM revenue - $75m
LTM net income - $3m

Management guided $100m at 50% gross margin for 2025 exit. SG&A decreased in 2024 compared to 2023. With a valuation allowance of $4.4 million they are not paying cash taxes for a year or two. 

2024(e).

Revenue - $90m
GM - 40%
SG&A - $23m
EBIT - $13m
Net income - $12m

So, 10x earnings gives us $120m market cap or $33 share price on 3.6m shares. That’s a decent upside within a year's time while assumptions made to get us there are not overly optimistic. If trend shows any signs of continuation into 2026 the upside could be much higher.

Radios

There is a radio you listen to (or used to listen to) in your car - that is one-way radio. Then there is a radio used for communication between two parties like between two police officers. These are two-way radios and are called land mobile radios (LMRs). LMRs’ first wave of adoption happened during World War I in the military and marines. The second wave occurred in the 1940s-1950s when police departments and taxi companies started using radios at scale. To keep this short I won’t spend much time on technological developments and market adoption of radios, although it’s an interesting subject. The two important things for thesis are:

1)      Radio is a preferred method of communication to cell phones in certain fields of operation because radio is more stable and reliable. Fire, police, and medical departments obviously operate under rough conditions where communication must be counted on 100% of the time.

2)      Radio waves of different frequencies behave differently depending on the physical environment around them. That's why there are a few established operating bands for radios: very high frequency (VFH), ultra high frequency (UHF), and 700/800 MHz and above. For  example, agencies might use VHF radios in rural areas and UHF radios in cities because UHF signals can penetrate buildings better than VHF signals due to their shorter wavelengths. Some radios only work within one frequency band, some radios work in many (multiband).

Events of modern BK

From 1998 to 2018 the company was called RELM Wireless corporation. In 2018 the name changed to BK Technologies. Modern history of the company begins in 2020 when they introduced BKR 5000 - “premier single-brand radio for first responder agencies”. BKR 5000 is a single band radio. Company also announced it had been working on and was about to release their first multiband radio - BKR 9000. When new CEO, John Suzuki, was brought in in 2021 he was led to believe that the product was ready to go live by the end of the year. After meeting the engineering team it became obvious to John that the product was not ready. We can kitchen sink everything as a reason for BKR 9000 release delay - Covid, supply chain issues, rise of interest, even hurricane Ian. But, long story short, BKR 9000 was finally released in 2023 and is now on the market. BKR 9000 is roughly a $2500 radio vs $5000 for Motorola’s equivalent.

BKR 5000 release was successful partially because it was sold to a market that was already familiar with BK. Agencies were already using BKTI’s products and when the time came for replacement they just went with the new product company recommended. BKR 9000, while has the potential for a broader market (as most of the market uses multiband radios), does not have an operating history. That’s why it was important to observe and validate the ability of the company to penetrate into the new markets. It is relatively early to say but we can already see progress. For example, Boulder County in Colorado made an order of 315 BKR 9000 radios which is a decent order. Per company commentary “this order is especially exciting because Boulder County is a Tier 2 county with over 300,000 residents showcasing the BKR9000's ability to penetrate larger markets”.

BK’s has been manufacturing their products in West Melbourne, Florida but always relied on contract manufacturers to support their in-house activities. In 2023 the company made an agreement with existing contract manufacturer, East West Manufacturing, to become the exclusive manufacturer of their radio product line. In other words, they shifted production from Florida to Mexico (Juarez). East West, a long-standing reliable partner of BK, bought $2m worth of BKTI stocks and warrants after the agreement was announced and, as of the latest quarter, produced all the BKR 5000s for the company. The BKR 9000 production line is being established now. Existing Melbourne facility stays to focus on new product introduction in support of the company's engineering efforts.

Stakeholders

FG Global used to own 13% but fully exited after their leader Kyle Cerminara left the Chairman position in BKTI. FG Global were pretty hands on and helped a lot according to CEO John Suzuki. John owns less than 2%. His latest open market purchase was earlier this year - $113k at $14 a share. Joshua Horowitz owns 3% and recently made purchases at a price as high as $18.83. He’s done well on LMB. AIGH capital owns just under 8%, they’ve been reducing their stake this year. So, overall, nothing crazy. 

Conversation with management

I have talked to CEO John Suzuki and CFO Scott Malmanger. Both came out as conservative, reserved and to the point guys. Below are insights which I found useful.

●       There are 700,000 radios sold in the US every year, 25,000 of them for wildfires fighting.

●       Example of free advertising. Oftentimes rescue groups come from all over the country to help with fires in California. These people are handed BKR radios and some of the people had never heard of them before. If they like it when they go back home they start looking into it.

●       Average useful life of a radio is 10 years. Most of the sales in the market are equipment replacement sales.

●       BK does not need to win Tier 1 customers like New York with 30,000 officers. 80% of law enforcement agencies have 80 officers or less. Target was always Tier 3. Now with BKR 9000 Tier 2 is a target too. There are 3000 counties in the country, each Tier is roughly a third.

●       95% of the sales are not through bidding but through contract vehicles. This basically means that government agencies that are on a lookout to purchase radios are not collecting bids and deciding. They more or less know who they go with.

●       The CEO thought BKR 9000 was almost ready for production in 2021 when he joined. That was not true.

●       It took 2-3 quarters after joining the company to convince the board to stop paying dividends.

●       For the most small agencies radio procurement is a large expense so it has its own contact and is rarely bundled with other purchases. Sales teams are usually local resellers.

●       International revenue mostly comes from Canada. BKTI have a good customer there. International sales are not a priority at all because there are more than enough opportunities in the US.

●       Some parts that go into radio production are sourced from China and there is a risk. But China is so much cheaper. There are plans to work more with Vietnam in the future.

●       Company will not close down the facility in West Melbourne even though most if not all of the production will be handled by East West Manufacturing in Mexico by the end of the year. BKTI leases approximately 54,000 square feet of industrial space which includes two buildings. One building is a warehouse. Second building is half factory and half office.

●       Motorola has 60% margins but they have higher software revenue contribution. So going from the latest quarter 37% margin to high 40s by the end of 2025 is not unrealistic at all with BKR 9000 sales and manufacturing fully handled by East West (note: if we look at Motorola financials they show 50% margins. Maybe CEO meant the LMR side of the business of Motorola).

●       Buybacks were no-brainer at $14 but not a no-brainer now. They will constantly evaluate options for allocating capital as they will earn more cash going forward.

A few notes on products

The investment idea relies on the ability of the company to steal market share from Motorola. Luckily there are many radio enthusiasts online who share their opinions on Reddit, Youtube and various niche forums. It was interesting to scout through those. For example, there are people who say “BKR was forced on us”, people who say “I am the radio guy in our department, what do you guys recommend?”, and of course people who say “all new radios suck, I wish we could keep the old ones”.  

There are some fair critiques of BKR 5000 problems with knobs and battery charges but nothing too crazy. It was nice to find on a forum that BK went with another vendor for the BKR 9000 knobs since they were having issues with the 5000's. 

We must also admit that there are many die hard Motorola fans out there.

There are reviews where BKR 9000 is compared directly against Motorola and Kenwood equivalents. While we cannot say BKR knocks it out of the park all the time, what we can say is that it is a decent alternative and the product finds its customer. BK takes home a super small share of the market at the moment so even small gains here will have a meaningful impact for the company.

Extra

Company also introduced a software product - InteropONE. It is a push-to-talk over cellular service. At this point software offering is a call option. If BK manages to conquer more government verticals and grow their reputation beyond wildfires, the SaaS solution can work out nicely.

Risks

●       Company cannot sell enough BKR 9000

●       Management mismanages the excess cash flow which they about to start earning

●       Change in government sales process

●       Motorola or EF Johnson come up with a much more superior and cheaper product

Conclusion

This is a fairly simple thesis of revenue growth and margin expansion. Most of the hard work of rolling out a new product together with difficult market conditions are behind now. The company just needs to keep doing what they’re doing in order to deliver satisfactory results. Based on moderate growth assumptions BKTI is a $33 stock by the end of 2025.