Iteris: Locked and Loaded

I have obviously been pounding the table on this business for quite sometime, and while I pound the table, I guess I have been pounding the stock down as well. Jokes aside, I think this is a relatively cheap business that just became positive in their operating profit, sold off their agricultural segment to focus on their roadway sensors and software, and continue to reap the benefits of increasing ARR and deals with local governments. A nice catalyst would be some sort of infrastructure bill, which management has noted, but we will see. My thesis is obviously not dependent upon an infrastructure bill, just an extended catalyst.


One thing I think has been putting pressure on the share price is management saying this on the last few calls...


"Before we begin our regular earnings commentary, I want to remind everyone that on March 8, 2021, the Board announced that Iteris initiated a comprehensive review of strategic alternatives. We believe that would disadvantage our shareholders to impose an artificial deadline on this review. And at this time, the review is still ongoing. While there are no material updates to share right now, I know that everyone is eager to understand the status, so I'll provide some color on the state of play. Our Board has been highly engaged with the company's external financial, legal and other strategic advisers to identify and assess a range of alternatives to enhance Iteris' value and market position. All of us have founded very interesting and constructive to conduct an independent assessment of our competitive environment, core competencies, marketplace dynamics, technology trends, and relevant public and private market valuations. This work has reinforced our view that we participate in a large and dynamic market, and Iteris is in a unique position to capitalize on opportunities ahead. We'll have more to say as we conclude the review and hope to be able to update you with our progress in the near future. In the meantime, we don't have anything to say beyond what we included in our prepared remarks."


Obviously as an investor, this is very annoying and provides 0 clarity on anything to provide value to me. So why would people buy shares with such uncertainty? Well, we could stick to the fact that it is cheap on a fundamental basis, has some tailwinds in their favor as they produce record revenue, backlog, and ink new deals almost monthly...


Let us take a look inside.

 

Data as we all know is important, the process of breaking it down and utilizing it is even more important. There is this this called V2X, this stands for vehicle-to-everything. To me, this is the epicenter of connected and smart infrastructure especially as automated vehicles start making headlines. We have to be able to connect these vehicles, to essentially everything, hence V2X.


Iteris sits at the front of this trend. As populations grow within cities, they are becoming crowded, which also leads to more devices and more data. An small example of what Iteris does: "Whether we talk about artificial-intelligence powered detection sensors on traffic signal mast arms that can detect and differentiate between vehicles, cyclists and pedestrians, or the V2X communications technology that can take that information and relay it to vehicles’ onboard units to alert oncoming drivers that people are present on a crosswalk, data and the seamless communication of those data can save lives." (Source)


Look, the business trades at 17.4x NTM EV/EBITDA and 52x NTM EV/EBIT. Estimated growth for EBITDA in 2022 is 40% and 70% in 2023, growth for EBIT is around 1,111.24% (skewed because of becoming positive and 152% for 2023. In FY 2021 they posted very flat EBIT of .44m after posting losses in Q3 and Q4, EBIT in 2022 is estimated to be around $5.32m.


This is a boring company, I get it, but it is growing very fast. The revenue guidance range they gave us in Q1 for the year is including uncertainty on the global chip shortage, they were buying ahead and increasing lead times and diversifying the supply base. So they are taking the right measures, but supply chain is still tight. Imagine that. Supply constraint and you are growing top line estimated between 15% low end and 21% at the high end. Ha.


This was "cautious" guidance!


The stock is down 7.17% YTD, I am down much more, around 17% I believe. Great timing on my part. Price targets are in a range from $8 to $10, so it is at $5.25 because that makes sense.

 

Deals, Deals, Deals


As of recent, Iteris is expanding its operations with the New Hampshire State Police utilizing their commercial vehicle operations SaaS solutions for safety and mobility across the state. Obviously this supports the continued thesis of Iteris growing their backlog and inking new deals.

 

The next three and five year periods I believe are going to look much more financially different than the past three and five year periods, with no more unprofitable agricultural segment, the company can truly focus on their core offering and growing the SaaS as a % of revenue. Cash from operations has compounded at a very strong 52.03% over the past 3YRS (CAGR), and 25.22% over the past 5YRS. Earnings have been hurt by the unprofitable Agricultural segment which management seems to have realized and sold off last year.


 

Chart:

MACD finally turning up a bit after months of trending lower, seems to be finding some support. Its such a small market cap company that TA is almost useless. But this is what I was looking at.


I am long, looking to have another quarterly report on them after they report to re-evaluate the financials and growth.


Position:





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