Machine-to-machine communication (M2M) is an exciting field of cutting-edge science that, according to ABI Research, is set to soar from $1.3bn in 2010 to $3.7bn by 2013. This should propel the profits of Sierra Wireless (25% global share) along with it.
Sierra’s M2M products have been deployed across the world. They are most commonly used in car navigation systems, vending machines, smart meters and point-of-sale terminals. Additionally, the business has specific expertise in making cars, a sector that’s due to undergo an IT revolution over the next five years. Under the European eCall initiative (a government mandated programme), it could become law for every new car to be fitted with an M2M safety device. That’s an annual 15 million unit opportunity. Yet that’s only half the story. Sierra also owns a synergistic mobile computing division (50% of revenues) that designs wireless broadband accessories. These include PC data cards, wireless hot-spots and USB modems for the likes of AT&T, Telstra and Sprint.
So why did the stock plunge 25% after the final-quarter 2010 results were released in February? Wall Street got cold feet over the soft first-quarter 2011 guidance. The issue is that some US customers are temporarily pulling back on purchases ahead of the imminent transition to faster 4G networks. To my mind, this brief “air-pocket” in demand is par-for-the-course when there is a transition to more up-to-the-minute technology. And I’m sure that once the switch to next-generation kit has occurred, there will be a wave of orders that will easily meet the normal upgrade cycle.
Sierra Wireless (Nasdaq: SWIR), rated a BUY by Canaccord Genuity
In terms of the numbers, analysts are forecasting 2011 sales and underlying EPS of $669m and 66 cents respectively, rising to $742m and 96 cents in 2012. The balance sheet is strong too, with net cash of $112m, or $3.55 per diluted share. I would value Sierra on an 11-times 2012 EBITA multiple. After discounting back at 12% and adjusting for cash, that generates an intrinsic worth of $14.50
per share.
As with any hi-tech industry, investors need to be aware that IT can become obsolete, that there are foreign-exchange fluctuations and component shortages and, in this case, cut-throat competition from Gemalto and Telit. In the event of a double dip, there could also be delays in implementing 4G infrastructure, or difficulties rolling out applications for eCall and smart metering.
The bottom line, however, is that Sierra is a class act operating in rapidly expanding sectors and should reward patient investors handsomely over the next few years. What’s more, I think Sierra should beat the Street’s conservative 2011 estimates and trigger a slew of earnings upgrades. Canaccord has a target price of $16 per share.
Recommendation: BUY at $10.30