With plenty of volatility in its shares, Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR) is not for the faint hearted. But having fallen 37% from highs hit in June of this year, investors have an opportunity to get in at attractive levels.
And maybe even the faint hearted will see an opportunity here to get exposure to this company, which is the global leader in the machine-to-machine (M2M) market.
First off, it bears highlighting that the growth of this market is big. M2M simply refers to direct communication between devices, and one needs to look no further than their homes or their automobiles to see the value in this.
From remotely unlocking your garage door to connected cars that can sense their location on the road and locate available parking spots, we can easily see the value in the world of M2M technology.
The M2M market is expected to expand to in excess of 27 billion connected devices and to a $3 trillion market by 2025, and with $800 million in revenue, Sierra is well positioned as a leader. Some estimates are even more optimistic and call for the market to expand fourfold to 50 billion devices by 2020.
Needless to say, the opportunity is huge.
The stock has fallen 37% since highs of over $40 hit in June this year. At the same time, the company has been reporting better-than-expected results.
Organic revenue growth has strengthened to just over 11% in the latest quarter to $173 million, as the company is recovering from the weakness it experienced in 2015 and 2016, when it saw lower demand from certain large automotive OEMs.
Shares now trade at a P/E of 28 times 2017 expected earnings and 24 times next year’s earnings. And, after long periods of this company’s shares trading at unsustainable levels, that meant the company was priced for perfection.
Sierra’s balance sheet still looks stellar, with negligible debt and a cash balance of US$102 million.
Furthermore, the company has been and continues to generate healthy cash flows with each quarter. In 2016, Sierra reported cash flow from operations of $47 million and free cash flow of $31 million. This represents a 181% year-over-year increase in operating cash flow and a $27 million increase in free cash flow.
While in the past, it was a decrease in the stock price that was driving valuations lower, but as of late, we have also seen increases in EPS that are driving valuations lower. It’s a good spot to be in.