This article was written by Brandon DaSilva
- Move to interconnectivity among consumer objects makes Pointer’s services a must.
- Slow growth in Brazil discounts Pointer’s stock price and provides a great buying opportunity.
- Pointer’s initiatives to grow as a leaner company while increasing margins seek to maximize shareholder value
The next massive trend to hit the world is called the “Internet of Things”. This rapidly emerging trend is all about connecting everyday consumer objects onto a network. The number of objects being connected to a network is growing larger every day. Mobile resource management (MRM) seems to be one of the ways that vehicles are becoming part of the internet of things. In fact, over the next five years, it is projected that this industry will grow at a CAGR of 23%. This growth is exponential, with current market penetration at around 15%, and it is expected to be hovering around 50% by 2020. Pointer Telocation is positioned to take advantage of this exponential growth as it becomes a MRM pure-play stock.
Pointer Telocation Position in Automobile Generational Shift
Pointer Telocation is a leading provider of “Software as a Service (SaaS) to the Fleet, Automotive, Insurance, Cargo, and Public-safety industries.” Pointer’s services improve response-time, increase reliability and reduce operational costs among fleets. Essentially what they do is connect vehicles to a network that allows businesses to track and monitor their vehicles from the office. This connectivity ultimately eliminates much of the inefficiencies faced by transportation companies. The rapid adoption of technology among consumers, in regards to the Internet of Things, is going to serve as a tailwind and allow Pointer Telocation to come out on top.
Pointer’s growth potential is hidden due to adverse FX conditions
Pointer Telocation receives 70% of their revenue from Israel, where they are based, and receive the rest mostly from Latin America and Europe. Revenues from Brazil have had the largest impact on Pointer’s growth recently and was a big reason for their 7.5% decrease in revenues last quarter. Brazil’s weak economy has served as a headwind for Pointer, but may serve as an opportunity for investors to get in before Pointer growth kicks in.
Pointer is taking measures to ensure higher margins
Another reason for the decline in revenues this quarter was that Pointer Telocation dropped two of their lowest margin customers. Although they took an initial hit to top line, Pointer Telocation is investing in growth and efficiency, which compensate the drop with higher margins. Dropping these two customers immediately increased their gross margin by 2%. Pointer isn’t stopping there to grow their gross margin.
Currently, Pointer has two main revenue streams: MRM and road-side assistance (RSA). Starting in the second quarter of this year, Pointer is going to spin off their RSA part of the business in an attempt to make the company leaner as well as provide higher margins. With this spin off, Pointer will then become an MRM pure-play, which is attractive to investors seeking focus their money on the Internet of Things. The spinoff will also increase their gross margin from 34.5% to 46.5% almost immediately. However, investors should be aware that revenues from RSA accounts for 1/3rd of total revenues for Pointer. Thus, when the spinoff occurs, there will be a drop in revenues, but investors should not be scared off as this is all part of Pointer’s plans to grow as a leaner company. Also, considering the rapid expansion of their industry, revenues will recover to 2014 levels by 2016, and have greater upside in the years to follow.
For the projected income statement, MRM revenue growth was conservative at only 15% growth due to the headwind coming from Brazil. RSA revenue was only recorded for the first half of the year because after that, the spinoff is going to occur. Thus, cost of revenues for half of the year is at 34.5%, while the second half of the year it is at 46.5%. Based on management’s guidance, I projected that operating expenses were going to stay constant at Q1 2015 levels. Even though revenues are expected to drop in 2015 due to the absence of RSA revenue for the second half of 2015, the higher margins and lower operating expenses could potentially double operating margins.
Pointer is positioning itself perfectly to achieve its expected growth. They have maintained positive operating cash flows for the past couple of years, and they expect this to continue going forward, especially with higher margins in the near future. Their positive operating cash flows have increased their cash balance by 156% from 2013 to 2014. This means that Pointer’s business is sustainable and that they are able to fund their growth internally.
Valuation Indicates 150%+ Upside
The valuation football field below is based on multiples using the following companies: Fleetmatics (FLTX), MiX Telematics (MIXT), Ituran Location and Control (ITRN), and LoJack (LOJN). The valuation was adjusted to take out any outliers on the high end of the valuation. Most of Fleetmatics valuation multiples were very large and thus, only some of them were taken into consideration during the valuation of Pointer because otherwise the valuation would be inaccurately large. On the lower end of the valuation, LoJack provided Pointer with a valuation currently below their market price. But that is because LoJack is the only company on this list that does not have positive earnings, which is why it might not be the best representation of the fair market value of Pointer.
Looking at the valuation metrics above, it is clear that Pointer is trading at a heavy discount to its comparable peers. Even with the revenue decrease in my projections for 2015, Pointer is still undervalued, and has a weighted average implied price of about $20. With Pointer currently trading around $8, this provides investors with 150% upside. The catalyst for Pointer is going to be when investors see that MRM revenues are growing at a substantial rate, regardless of the RSA spinoff. Due to Pointer only having 45% of their shares outstanding in their float, expect the price to increase rapidly when growth is realized.