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Tuesday, September 9 will go down as a watershed day in the history of wireless connectivity firm, Sierra Wireless (SWIR).
The company announced that it had shipped its 100-millionth connected device across 80 global networks, since shipping its first one in 1997.
Such growth has only accelerated in recent years, as the company is front and center of one of today’s biggest technology trends.
Indeed, this mega trend has proved to be a proverbial money tree for Sierra.
Here’s how it’s cashing in – along with my investment verdict…
Three things immediately stood out after I dug through Sierra’s financials.
- The company is trading at a five-year high, despite several key ratios dropping to five-year lows.
- Sierra achieved enormous net income growth over the last two years – up 288% to be exact. Impressively, the firm turned the $30 million it was losing back in 2011 into a whopping $55-million profit by the end of 2013.
- The company reported profitable years in both fiscal 2012 and 2013 ($27 million and $55 million, respectively) – even though it had negative operating income, and negative earnings after income, taxes, depreciation, and amortization had been accounted for.
I really wanted to know how the company pulled this off…
The answer was buried deeper in Sierra’s bottom line – namely, an influx of cash filed under “Net Income From Discontinued Operations.” The tale of the tape was $31.4 million in 2012 and $70.6 million in 2013.
In other words, Sierra’s tremendous profit turnaround was thanks in part to the non-recurring payments the company received after selling off one of its business segments (AirCard).
So when you glance at Sierra’s financials and see that its trailing 12-month net income has fallen back down into negative territory, it’s not a fully accurate assessment. If it weren’t for the sale of its AirCard business, Sierra would have never left negative territory in 2012 and 2013.
That said, it’s turned a profit in the past without the help of non-recurring payments.
In fact, if you value Sierra using the enterprise value/EBITDA ratio, the company has significant upside potential. Here’s how…
When using Sierra’s median EV/EBITDA 12x multiple, and applying it to its five-year median projected EPS of $0.58, it shows that Sierra has a very real chance of surpassing $100 per share by 2019. And that’s with a 77% margin of safety, to boot…
C.H.A.O.S. Meter: 17/20
When I talk about “high-impact” technologies, I’m referring to innovations that reshape entire industries.
And Sierra did that by introducing the world’s first cellular embedded module in 1997. If you’re unfamiliar with cellular embedded modules, check out the video below…
As you can see, the technology plays an enormous role in mobile connectivity. It’s the fundamental reason why we can connect our mobile devices to essentially everything.
Of course, these M2M modules are much more sophisticated and come equipped with an array of functionality.
Sierra’s technology also provides voice and data services using cellular wireless technologies, which include second-generation cellular standards, or “2G.” Then there’s 3G and 4G standards, such as LTE.
As I said, Sierra has shipped over 100 million “connected” devices. And as the mobile technology and Internet of Things trends become even more prevalent in the coming years, expect Sierra’s heavily patented technology to remain among the most innovative in the industry.
C.H.A.O.S. Meter: 19/20
For Sierra, there’s no better accelerant than validation of the Internet of Things (IoT).
We’ve seen quite a bit of IoT validation in the months leading up to Apple’s (AAPL) iPhone 6 unveiling. Sierra shares have responded accordingly.
In addition, every time Sierra reports positive results from IoT-related product demand, it further validates the strength of the IoT trend.
This explains why the stock’s upward price swings are much stronger than downtrends (on the rare occasions it misses earnings, that is – something that’s only happened three times in the last 15 reports).
History shows that the third quarter has consistently been Sierra’s most lucrative, and has provided some of the company’s largest earnings beats.
And at the end of July, Jim Cramer upgraded Sierra, which helped garner a ton of positive media attention.
Expect this type of positive acceleration to continue as the IoT becomes more prevalent. And especially since companies like Apple and Oracle (ORCL) have given their seal of approval to the trend.
The only negative for Sierra is its heavy trading volume. Shares can nose-dive on bad news, or on a broader market selloff, where stocks like Sierra are the first to get hit hard.
However, over the last six years, shares have galloped from the $2 range to the $26 range. In other words, the weekly price swings should only be concerning for an entry point.
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C.H.A.O.S. Meter: 19/20
In the past, Sierra operated as a data device manufacturer, selling mobile broadband to mobile network operators and PC OEMs.
But after the sale of AirCard, Sierra’s focus has migrated towards developing hardware, including embedded modules, intelligent gateways, and software solutions for the M2M market. In other words, Sierra has become a pure-play leader in the M2M industry.
As such, Sierra now sells its products and solutions to the following types of businesses…
Mobile Network Operators: These companies own, deploy, and operate wireless networks that provide mobile services to customers.
Infrastructure Vendors: These firms provide the equipment and software to build the networks that mobile operators sell.
Device Manufacturers: They develop the voice and data communication devices – such as handsets, mobile broadband modems, and embedded wireless modules – that connect to the networks.
Software Application Vendors: These companies provide end-user applications to enterprises and consumers, so they can utilize the wireless networks.
When you add it up, Sierra’s product user range is widespread. The company gets orders from consumers, mobile employees, law enforcement personnel, utility workers, vehicle owners, commercial drivers, and healthcare professionals.
It also sells its products to OEMs, mobile network operators, distributors, and value-added resellers that boast well-established sales and distribution teams around the world.
Those teams have helped Sierra garner business with some of the biggest names in the industry, like Cisco (CSCO), General Motors (GM), Honeywell (HON), Phillips (PSX), Chrysler, and Dell, to name a few.
And because of its reputation and growing product line, the company increased its enterprise segment revenue to $59.9 million (17.7%) and OEM segment revenue from its AirPrime products to $382 million (10%) in 2013.
Orders have been strong for Sierra, leading to significant top-line growth over the last four years. The question now becomes this: Can Sierra stay out of the red without the non-recurring payments and tax benefits it received from the sale of AirCard?
History tells us that the answer will be, “No.”
C.H.A.O.S. Meter: 14/20
There are three key growth drivers for Sierra…
Continued Deployment and Upgrade of Global Wireless Networks: Mobile network operators continue to invest in network upgrades to support 4G technologies, enabling mobile broadband connectivity of up to 100 megabits per second. As such, they need companies like Sierra to help stay competitive.
Increase the Number of Devices Connecting Wirelessly: Today, more manufacturers are able to integrate wireless functionality into their devices because of vast improvements in wireless chipset technology. These advances are fueling significant growth in new wireless devices seeking to fill a growing demand for connected applications across various segments – many of which Sierra has covered.
Focus on M2M Services: To drive subscriber growth, mobile network operators and large system integrators are focusing on machine-to-machine connectivity. For example, we’re seeing more M2M solutions being incorporated into the business models of large enterprises. And we’re seeing many mobile operators introduce new wireless pricing models for M2M and connected device solutions. In doing so, they’re organically growing the demand for solutions from companies like Sierra.
Sierra is on the forefront of global M2M adoption. And the company has developed its strong competitive advantages through the acquisition of other, smaller companies over the last few years. These strategic acquisitions are incredibly important for Sierra. For instance…
- Its purchase of AnyDATA allowed the company to extend into Korea’s M2M market, while simultaneously entering new subsets of the M2M industry.
- With its purchase of InMotion’s mobile enterprise business in March, Sierra has further expanded its portfolio of solutions to include rugged in-vehicle mobile routers. The company should start realizing revenue growth from this purchase throughout 2015 from more niche subsets, like public safety, transit, and commercial fleet use.
But keep in mind, Sierra doesn’t have the kind of disposable cash that companies like Oracle do, meaning an acquisition that doesn’t pan out will be very costly to investors.
Also, Sierra’s products are subject to mandatory regulatory approvals in the various regions in which it operates. While its current product line has passed the approval processes in the United States, Canada, and Europe, all its future products will have to run through those same gauntlets, which can hinder a product’s time to market.
C.H.A.O.S. Meter: 16/20
OVERALL C.H.A.O.S. RANKING: 85/100
Final Verdict: Sierra has hit the key 85-point mark… which means it’s earned my “Buy” rating. However, I’d wait for a dip before jumping in. Historically, shares cool off by about 30% before heading higher. But they’ve only dropped by 16% from the 52-week high of $30.55 on September 19. Set a limit order at the $22 price range and wait for shares to come down.
One thing to note, though: Sierra reports earnings on November 5, so make sure you’re invested before then. Like I said, Sierra’s long-term valuation is substantially higher in the years ahead. We’re just looking for a better entry point to jump in.
Your eyes in the Pipeline,