Image Sensing Systems (ISNS) a Good Company, But Only After It Fades

August 28, 2014 • Analysis • Tags: ,

Day traders have bid up security stocks as national media coverage has raised exposure from the Ferguson unrest. Small float stocks such as Digital Ally (DGLY), Image Sensing Systems (ISNS) and Vicon Industries (VII) have sky rocketed on very little fundamental change. Once traders move on, which is a given, these names will fall back to normal levels. For Image Sensing Systems, I believe a return to mid $2 (where it was trading prior to trader exposure), will provide a good opportunity for investors to enter.

As Volatility Drops, So Will Price

Image Sensing Systems has nearly 5M shares outstanding, of which 3M are part of the trading float. To put into perspective, in the last two trading days, over 27M shares have exchanged hands. This is over 9x the float, something very unusual since average daily trading is under 100k. As mentioned above, “security” stocks have gathered the attention of traders, who have bid up prices. However, traders are known to have short lived affairs with their trading targets so these unsustainable prices will undoubtedly fade.

What Makes Image Sensing Systems Attractive

ISNS provides products and solutions that optimize traffic flow, enhance driver safety and address surveillance concerns. The company’s three segments include:

Intersection- Autoscope video captures video images of traffic and analyzes information for traffic management.

Highway- Autoscope Radar ensures smooth traffic flow to prevent accidents

License plate recognition (LPR) - Autoscope LPR used in crime prevention and parking markets

As the number of metropolitan cities continues growing worldwide, the adoption and funding of more effective traffic control will also warrant greater attention. To be the front runners, Image Sensing Systems has commenced a restructuring process as revenues have seen a 20% decline since 2011.

Revenue Drivers

CitySync, a recognition-as-a-service (RaaS) cloud solution, combines intelligent cameras with cloud software that enhance security and license plate recognition, a service deployed by cities and businesses. This has been claimed as an industry game changer by ISNS management, who expect top line in 2H 2014 to experience greater traction than the first half of the year.

Image Sensing Systems has a royalty agreement with licensee Econolite for the sale of licensed products whereby the company receives 50% of gross profits. This royalty revenue, which has accounted for 48% of total revenues so far in 2014, has minimal costs since much of the manufacturing and distribution is handled by Econolite. Therefore, the company can expect approximately $11-12M of royalty gross profit for the full year leading to free cash flows from the licensing agreement of roughly $8M.

Earlier in July, an amendment to the agreement has given ISNS full control of the Autoscope radar product line. This growing business segment will provide Image Sensing Systems with higher revenues during 2H 2014. Econolite will continue to manufacture, market and distribute the Autoscope video detection products.

Profitability in Sight

Management has guided that in order to reach breakeven, the company will need to bring in revenues of $28-$29 M. At current pace, Image Sensing Systems is expected to have full year revenues of around $25M. With the revenue drivers listed above and management’s restructured focus on maximizing return on expenses, profitability can be reached within the next 12 months.

Risks

In December 2012, two employees of Image Sensing Systems’ Polish subsidiary were accused of corruption. Neither the Company nor any of our subsidiaries has been charged with any offense, however the investigation is ongoing. The company has not given any estimated damages. In my opinion, the issue occurred 20 months ago, so the worst seems to be over in regards to costs incurred. However, this overhang should be considered by any perspective investors as a downside.

Conclusion: Wait until the fade

Trading at a current price of $3.80, I expect ISNS to fall back to the mid $2 range when the hype from traders settles. At the lowered levels (which also linger around historic lows), Image Sensing Systems could be a value play. The company is integrating new revenue streams and has a licensing agreement that provides $11M annually. Restructuring will take several quarters, but investors could see huge upside by picking up Image Sensing Systems at near historic lows. 

Investment Time Frame
How long do you plan to stay invested in Image Sensing System (ISNS)?

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