A Rare Value Play in a Red-Hot Sector
Sometimes it takes a while for the rest of the market to see the wisdom of our logic when it comes to identifying promising stocks (and, of course, sometimes it never does. The nerve!).
On August 11, contributor Dave Sterman touted Sierra Wireless (SWIR), a seller of mobile computing and machine-to-machine communications products, in large part due to the promise of the Internet of Things and 5G phenomena. Two weeks later, shares were nearly down by nearly one-fourth before rebounding in a big way: In the ten weeks ended last Friday, shares shot up by an astounding 57.7%.
Dave identified another company that stands to benefit from the trends in the IoT and 5G, a rare find with low multiples. He’s certainly not suggesting that we’ll see the same type of explosive share-growth as SWIR, but it’s one he thinks you’ll be hearing a lot more about in the months to come.
— Bob Bogda, Editor
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About four months ago, I laid out the case for the coming era of the Internet of Things (IoT). Powered by ultra-fast fifth generation (5G) wireless technology, the ground is set for the Internet to extend across industries, giving machines and systems a new level of smarts.
As I noted when looking at this emerging tech trend, fully $1.5 trillion will be spent on IoT-related hardware, software and services by 2030. And I suggested that Sierra Wireless (SWIR) would be a great way to profit from that massive coming spend. While shares of this firm initially drifted lower in the weeks after my recommendation, they’ve recently caught fire, surging from below $11 in mid-November to a recent $15.80. Investors are clearly warming up to Sierra Wireless, and I still see ample upside ahead.
Yet this IoT trend figures to be so expansive that it pays to keep digging for fresh ideas to play it. And I have come across a firm that is on the tail end of a painful restructuring, yet perfectly poised to profit from the coming surge in IoT spending.
New Jersey-based Orbcomm (ORBC) had completed a dozen acquisitions over the past seven years in a bid to have a broad suite of products targeting the Machine-To-Machine (M2M, which is now referred to as the IoT) market. Trouble is, the firm ended up with 160 different products, many of which were slow sellers. And customers could access those products through 25 different company-run websites.
Thanks to a massive overhaul that has culled the product list by 75% (and directed clients to just one core website), Orbcomm has been able to more squarely focus on its highest-profit products while also paring general overhead expenses. The payoff: third quarter operating profits nearly doubled to $18.7 million.
Orbcomm sells small devices that help track and control various machines remotely. For example, the contents of shipping containers can be controlled for temperature or humidity. And fleet operators can get a better sense of whether truck drivers are complying with regulations such as speed and number of hours driven. The transportation sector accounts for around 60% of sales, though Orbcomm also has a strong presence in the marine and heavy equipment markets.
There are currently around 2.1 million Orbcomm monitoring devices in place, though 5G network speeds should help boost that figure well higher in coming years. The company is preparing to roll out 15 new products in the next 12 months that will take advantage of high-speed networks that can handle higher volumes of data.
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One of the ways the firm will pivot to faster speeds and a greater amount of data shared between machines is a recently upgraded relationship with satellite operator Immarsat.
Using Immarsat’s high-speed network, one core new product, for example, will handle data transmission rates that are nearly 40 times faster than Orbcomm’s current products. And the company has designed these devices to consume very little power. One device could be powered by a single AA battery for a number of years.
Yet, I remain most excited by the transformation that 5G will have on this business model. Satellites are great for tracking large moving devices like shipping containers. But 5G will be ideally suited for interactions between machines that are in close proximity.
This past October, the company received a 2020 IoT Edge Computing Excellence Award from IoT Evolution World, the leading web site covering the IoT marketplace.
Orbcomm aims to boost sales by moving into deeper relationships with existing customers as new 5G products come to market in 2021. Those customers include heavyweights like Walmart (WMT), Kroger (KR), Domino’s Pizza (DPZ) and Shell Oil (RDS-A).
As noted earlier, Orbcomm is planning for an aggressive rollout of new products, and such announcements can serve as catalysts for the stock as investors come to see how each new product may lead to sales growth. As CEO Marc Eisenberg said on a recent call with investors, “These products investments and innovation were made over the last few years and are now coming to fruition.”
Look for Orbcomm to generate around $54 million in operating profits this year. That figure could rise by nearly 50% by 2022, thanks to the ongoing rollout of new higher-margin products.
Measured against that outlook, the firm’s cash flow in relation to enterprise value (market value plus debt minus cash) stands below 7.5. Most tech firms that are pursuing dynamic market segments such as 5G, the IoT, and edge computing, tend to trade for double-digit multiples.
Orbcomm is not yet a well-known name among investors. But rising sales and profits in 2021 and 2022 figure to put this stock on many more investors’ radars.
Action to Take: Consider buying shares of Orbcomm (ORBC) up to $9 and sell when they reach $12.
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Dec 14th, 2020