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Investment Thesis
Ituran Location and Control (NASDAQ:ITRN) deals with providing telematic services, mainly consisting of stolen vehicle recovery (SVR) and tracking services. The company has recently reported record-break growth levels and I believe it can uphold its performance as a result of healthy demand dynamics and its continued expansions.
About ITRN
ITRN offers telematic services, mainly comprising stolen vehicle recovery (SVR) and tracking services. It also deals in telematic products linked with its SVR services and other various applications. The company provides its services and lease and sell its products in Brazil, Israel, Argentina, Mexico, Colombia, Ecuador, and the U.S. Its geographical segment are categorized into Israel, Brazil, and Others. Each of these regions represented approximately 51.32%, 23.57%, and 25.10% of the company’s revenues. It conducts business in two operating segments: Telematics Services and Telematics Products. As part of its telematics services segment, the company offers SVR, fleet management connected cars, UBI, and other value-added services. A majority of its revenues represent subscription fees paid by its customers. It recognizes revenues from subscription fees every month. This segment contributed about 71.50% to the company’s annual revenue in 2022. The telematics product segment earns revenue by selling its telematics products to its customers in the US, Israel, Brazil, Argentina, Mexico, Colombia, and Ecuador. Its telematics products ease short – and medium-range communication between two-way wireless modems and are utilized for various applications, including automatic vehicle location. This segment contributed nearly 28.5% to the total annual revenues in the previous year.
Financials
SVR technologies are becoming highly prominent worldwide due to increasing theft levels. In the United States, according to the National Insurance Crime Bureau, there were about one million vehicle thefts in 2022. This situation is even more severe in Israel where car thefts have been boosted significantly. This data shows us that there is a high demand for telematics. The SVR market is estimated to rise at a compound annual growth rate of 7.59% by 2030. Observing the company’s robust growth of subscribers by 48000 in the recent quarter despite the pressures from war situations, I believe, it is perfectly achieving organic growth in its business and catering to the growing demand by maintaining its resilient portfolio. Also, during the second half of the year, it introduced a new revenue source by announcing a partnership with Santander in the automotive market to uphold credit approval for clients who are willing to finance a new or used car. This expansion in the car financing segment has helped the company diversify its offerings and add more customers to its portfolio. This growth is reflected in its financial results as well. This partnership not only aligns with the current high-growth market trends but also helped the company to penetrate deeper into the markets and gain additional market share specifically in Brazil which can help the company to mitigate and balance out the impacts of war situations in Israel. I remain optimistic about the company’s growth and believe that it can uphold its consistent upside in the number of subscribers and boost its profitability by leveraging its effective expansion strategies, strong presence, and healthy demand dynamics.
The company has reported its quarterly results. It reported a revenue of $81.05 million, up 11.54% compared to $72.66 million in Q322. This growth was mainly fueled by to significant rise in net subscribers. Net income surged by 24.34% YoY from $10.06 million to $12.51 million. It reported a diluted EPS of $0.63. The Telematics Services and Telematics products revenues were $60.15 million and $20.90 million respectively. ITRN reported $39.87 million in liquidity and adjusted EBITDA stood at $22.50 million.
The company had a strong quarter and I believe it has a long-term growth prospect as a result of robust growth in the industry and its increased consumer offerings after the second half of the year which can potentially attract more customers and can boost its profit margins. However, in the short term, I think the growth might be resisted in the next quarter due to the ongoing war in Israel which can reduce the sales of new cars and direct to less subscriber growth for the company. The management also has a similar view and expects subscriber growth between the range of 30,000 and 35000.
Dividend Yield
The company has a consistent dividend payout which indicates its strong positioning. It distributed four quarterly dividends of $0.14 in 2022, totaling an annual dividend of $0.56 per share and representing a dividend yield of 2.14% It distributed a $0.14, $0.15, 0.15 dividend in each of the three quarters of the current year, and increased the payout to $0.24 in Q4 which makes the annual dividend of $0.68 and represents a yield of 2.60%. This growing dividend yield makes the company an attractive stock, especially for risk-averse and retired investors who are seeking fixed regular income along with capital appreciation.
What is the Main Risk Faced by ITRN?
The company’s telematics products and SVR services are mainly used to ensure cars and are mostly installed earlier or immediately after their initial sales. As a result, if the sale of vehicles is reduced, it can contract the company’s addressable market for telematics products and SVR services. New vehicle sales might be reduced for various reasons, including the ongoing military conflict in Israel. If this conflict continues for a longer time and impacts the business operations in Israel, it can negatively impact car sales and might result in reduced sales volume for the company as well, causing a contraction in its profit margins.
Valuation
The company has recorded a solid growth in subscribers and record-break revenue levels in the third quarter. I believe the company can preserve its growth trajectory as it is well-positioned to capture the growing demand due to its strategic expansions, strong market presence, and continued rise in net subscriber levels. After considering all these factors, I am estimating an EPS of $2.57 for FY2024 which gives the forward P/E ratio of 10.15x. After comparing the forward P/E ratio of 10.15x with the sector median of 25.84x, we can deduce that the company is undervalued. I think the firm can potentially grow in the next year as a result of positive demand in the industry and its expansions to penetrate the markets which can help it to trade above its current P/E ratio. I assess that the company might trade at a P/E ratio of 14.01x in 2024, giving the target price of $36.00, which is a 37.90% upside compared to the current share price of $26.11. Reduced car sales due to war can affect the financial performance of the company during adverse economic conditions. I think in that case, it can contract the profit margins and EPS of the company.
|
Scenario |
EPS Estimates |
P/E Ratio Estimates |
Target Price |
|
Best case |
$2.57 |
14.01x |
$35.01 |
|
Bear case |
$2.51 |
13.95x |
$35.01 |
I believe in the bear case scenario of reduced sales due to war, the EPS of FY2024 might be $2.51, and assess that the company might trade at a P/E ratio of 13.95x, which gives a target price of $35.01, representing an upside of 34.10%.
Conclusion
The company is experiencing a massive demand which is reflected in its record-break revenue levels. It has expanded its offerings during the second half of 2023, which I believe can potentially help it earn more profits by penetrating deep into the markets and capturing additional market share. However, it has certain levels of risk linked to the war situations in Israel which can contract its profit margins. The company pays a decent dividend and I think it can advance uphold this for a long time as it has a recurring revenue model. The stock is currently undervalued and we can expect a healthy 34%-38% growth from the current price levels as a result of its recent expansion activities and strong subscriber growth. After considering all the factors, I assign a buy rating to ITRN.
