The Opportunity of a Lifetime to Get into Sierra Wireless, Inc.

Recent troubles at Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR) and a stock-price stumble lead to a great opportunity.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published February 2, 2017 10:29 am EST

Sierra Wireless, Inc. (TSX: SW)(NASDAQ: SWIR) has had a rough go of things since 2015. In 2015, the company missed expectations because of lower demand from certain large automotive OEM customers due to what management believes is just general nervousness related to macro-economic conditions. And, to add insult to injury, the company also came out with lower than expected 2016 guidance, which had left investors questioning what was once deemed to be a very bright future for Sierra.

All of this sent the stock tumbling.

The shares have declined almost 60% since early 2015, and the increased uncertainty remains. However, in 2016, Sierra Wireless handily beat expectations, reporting better than expected earnings for each quarter. In the latest quarter, the third quarter ended September 31, 2016, Sierra reported adjusted EPS of $0.13 — well above consensus expectations of $0.09, and at the high point of the company’s own guidance of $0.06-0.13.

This is a good sign that things may be turning around, and that expectations have now gotten too low for the company.

Strong balance sheet and cash flow

Sierra’s balance sheet still looks stellar with no debt and a cash balance of US$112 million. Furthermore, the company has been and continues to generate healthy cash flows with each quarter. In the latest quarter, the third quarter of 2016, Sierra reported cash flow from operations of $25 million and free cash flow of $11 million. This represents a 32% sequential increase in operating cash flow and a 37% increase in free cash flow.

And some of this cash flow has been used to buy back shares, which provides some support for the stock. The company can buy back up to 10% of the shares.

Valuation

After a long period of being priced for perfection, trading at P/E levels (on adjusted EPS) in excess of 60 times, the stock currently trades at a significantly lower level — a P/E ratio of 40 times this year’s EPS and 31 times next year’s consensus EPS expectations.

And while the company has had record design wins and new customer acquisitions, management still anticipates a revenue growth rate of 8% for 2017, which is below the typical outlook for M2M growth and is below what the company can do in the longer term.

Similarly, after management has had to tone down estimates recently, I believe that management is being conservative in their guidance at this time. But the fact remains that management’s medium-term target for organic growth is still 10-15%, and their long-term target for EBIT margins is 10% (versus current margins below 5% currently).

So while growth estimates have been reduced, 2017 is still expected to see growth in adjusted EPS of almost 22%, which I think investors can have reasonable confidence in due to many of the points discussed in this article.