Inflection Point Investing LLC
Over the past eight quarters a major transformation has taken
place at wireless communications maker,
CalAmp Corp. (
. Long perceived as a steady supplier of durable satellite
equipment for the likes of EchoStar (
) and DirecTV (
), CalAmp's wireless division has quietly grown into the primary
driver of both revenues and profitability for the company over the
past two years. This is significant for two reasons.
First, with a year-over-year growth rate of over 40%, CAMP's
wireless division is poised to record $100M in revenues for FY
2012. With the division's gross margins averaging 40% (
4x the margins of the satellite business
), continued revenue growth in wireless will quickly translate into
accelerating earnings growth for the company overall. For those
with a discerning eye, it is not difficult to see this
transformation has already begun to take place. Let's discuss.
On Q4 FY2010, CalAmp posted quarterly revenues of $34.5M. The
company took a loss of ($0.05) EPS on a GAAP basis with its
satellite division accounting for 54% of its revenue. Two weeks
ago, in Q1 FY2012, CalAmp reported another $34.5M in revenues. This
time, however, it was the wireless division accounting for the
larger percentage of overall sales, at 64%, and CAMP earned $0.02
EPS on a GAAP basis, and $.05 EPS on a non-GAAP basis. The marked
improvement in CAMP's profitability can best be observed by placing
both sets of quarterly results side-by-side:
(Click to enlarge)
Perhaps the most striking aspect to the overall mix was the
improvement in the CalAmp's gross margins.
Note how GM's improved from 20.2% in Q4 FY2010 to 27.3% last
quarter, Q1 FY2012
. This trend should only accelerate further as the wireless
division continues to ramp over the next few quarters. The drivers
behind the growth in CalAmp's wireless business are a confluence of
major technology trends which call for new innovations in mobile
and remote connectivity. The company recently presented the
following data on its market opportunity at the B. Riley & Co.
12th Annual Investor Conference:
CalAmp's $1.5 Billion Opportunity
(Click to enlarge)
Source: CalAmp Corp.
With a $1.5B market opportunity to eat into and its targeted
markets growing 15% a year, CAMP's new CEO, Michael Burdiek, was
particularly upbeat on the company's recent conference call. Over
the past 18 months, CalAmp has released 30 new wireless products
targeting such areas as Oil & Gas, Utility, Public Safety,
Rail, Fleet Management, Asset Tracking and M2M communications. As
revenues from these new products continue to scale in coming
quarters, gross margins will trend higher, ultimately leading to
accelerating bottom-line profitability.
From CEO, Michael Burdiek:
The wireless technology adoption trends in fleet
management, asset tracking, energy management, transportation
security and public safety are extraordinarily favorable to
We are one of very few companies in the world with the
requisite core competencies to address the challenging
performance, reliability and environmental requirements of
these emerging applications …
... Momentum continues to build for several promising
emerging applications including stolen vehicle recovery and
automobile insurance among others. And finally, we are making
good progress on an important development project for the
rail industry. Beyond this development project we believe
significant growth opportunities for CalAmp in the
rail transport vertical as rail companies begin deploying
advanced wireless communication networks that improve safety
and optimize asset utilization
Unfortunately it often takes tragic events to prompt humans into
action. The terrorist attack on the World Trade Center on 9/11,
2001, prompted the wide scale adoption of security scanners at our
nation's airports. In the same way, we believe the high-speed train
tragedy that occurred in China on Saturday, July 23rd, will put
focus on the
need to scrutinize the safety and security of our nation's
. This last issue will become particularly resonant if President
Obama's plan for the first high-speed rail network in California,
between the Bay Area and Los Angeles, becomes a reality.
At the forefront of rail safety is a concept called Positive
Train Control ((PTC)) which emphasizes:
- Train separation or collision avoidance.
- Line speed enforcement.
- Temporary speed restrictions.
- Rail worker wayside safety.
Other benefits are believed to include
increased fuel efficiency and locomotive diagnostics
. However, according to the Wikipedia article, "these are benefits
that can be achieved by having a
wireless data system
to transmit the information, whether it be for PTC or other
applications." Hmm, wireless data systems? If you jump back to CEO,
Michael Burdiek's comment, "
one of very few companies in the world
with the requisite core competencies to address the challenging
performance, reliability and environmental requirements of these
you can quickly grasp the future business potentialities for CalAmp
in the rail arena alone.
At the B. Riley Conference, Burdiek also gave the following
comment and update on their positioning within the MRM markets CAMP
"Year-over-year growth in the wireless datacom business
is being fueled by our ability to effectively market a wide
range of products that enable end users to both lower their
operating expenses and enhance the efficiency of their
operation. The revenue breakdown within our wireless datacom
segment in the latest quarter was roughly 60% for MRM
application and 40% for wireless networks applications."
(Click to enlarge)
Source: CalAmp Corp.
After assembling this data, it seems abundantly clear the
prospects for CAMP's wireless business look very bright for the
next 12-24 months.
Turning to CalAmp's satellite division, the company is currently
shifting its satellite products manufacturing over to an
outsourcing model. This move should allow the satellite division to
break even at a $10M quarterly run rate. With three new satellite
products being released over the next six months, CAMP's satellite
business will begin to accelerate towards the end of FY2012,
turning profitable in Q3 and Q4. This is very important, as it will
first time in years that both sides of CalAmp's business are
profitable at concurrent times
Taken as a whole, we believe CalAmp has evolved from a
turnaround play to an impressive growth story. Not surprisingly,
investors have taken notice. While insiders have been consistent
buyers of CAMP stock over the past two years
(800,000 shares purchased vs. 10,000 shares sold),
until recently, the company has had difficulty attracting any new
institutional holders. But that was then, this is now. Take a look
at CAMP's 3-year weekly chart to see what we mean:
CAMP 3-Year, Weekly Chart
(Click to enlarge)
In our view, this is just the first wave of new institutional
holders to discover the CalAmp story. From a fundamental
perspective, even with the stock's recent move from $3 to almost
$4, CAMP still remains undervalued. When you consider CalAmp should
book $140M+ in revenues this year, with 28.3M shares outstanding,
its current market cap is just around $106M. As wireless becomes
the ultimate driver for growth, we see the market eventually
placing a 2x sales multiple on this side of the business. This
equates to a $7+ stock.
Looking to the back-half of the year, we believe the possibility
exists where wireless revenues move above $25M-$26M in a quarter.
Assuming the satellite business is also profitable by then,
we could very easily be looking at an $0.08 quarter as early as
. With this in mind, current estimates for 2H FY2012 and next year
all seem too low. As the market ultimately warms to the possibility
for $0.40 in earnings in FY2013, this should act as another
catalyst for shares and attract additional institutional interest
to the name.
I am long CAMP.
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