Ituran (ITRN) is a company that is minting cash for its shareholders but has managed to fly beneath the radar as evidenced by there being only one investor question on today's earnings call.
Over the last 9 months the Company produced ~$28 million in free cash flow and paid the full amount to investors (partially as a special dividend). That is approximately $1.33 per share or a 10% historical yield based on a $13 share price.
The Company's primary products are GPS tracking devices to help uncover stolen cars (think Lojack). They have a monopoly in Israel, where they are headquartered and earn ~50% of their revenues, and have a major presence in Brazil where they earn ~40% of their revenues.
The Company's growth potential going forward is very promising, specifically in Brazil. The Company recently entered into a joint venture partnership with [[GM]] to sell their tracking devices in GM cars ahead of the implementation of Contran Resolution 128, which states that as of January 2013 20% of new cars and trucks produced in the country will require the installation of locking and tracking systems. By August 30, 2013, 100% of cars will be required to have them and by January 2014 even motorcycles will require them. The Company has been successful in Brazil to date and expects to capitalize on the new rule.
They announced in their latest Q3 earnings on November 19th: "A 14 thousand quarterly increase in net subscribers to a record of 653 thousand subscribers as of September 30, 2012, the highest net growth in subscribers in 10 quarters". On the conference call they mentioned that most of this growth came from Brazil.
The main downside that the Company has been dealing with is the devaluation of the Brazilian Real and the weakness in the Israeli Shekel. The Brazilian government has made it clear that they intend to try and keep the Real below a 2:1 exchange rate. The good news is that even at these rates (or worse), Ituran will manage to mint significant cash for investors.
Even under a worst case scenario, where the Real and Shekel both depreciate by 7-10%, the company should still produce free cash flow of over $20 million next year. At the current enterprise value of ~$250 million that's a free cash flow yield of 8% of which half will be paid out of dividends.
If, however, the currency rates change course, and start to benefit Ituran, free cash flow can easily be above $35-$40 million taking into account the upcoming growth in Brazil.
In summary, Ituran has a business with a great moat (including monopoly status in Israel), a commitment to dividends, and an excellent free cash flow yield. I believe the upside potential is exceptional and the downside risks are minimal. That is why I've owned shares for several months and have continued purchasing as the price declined.
(Another potential catalyst for Ituran would be for it to acquire Lojack (LOJN) which currently has an enterprise value of only $1.2 million and would allow the company to gain a stronger foothold in the US. Lojack is currently involved in a potentially company crippling lawsuit but Ituran may decide that even with the lawsuit the acquisition could make sense.)
As with all investing, there are risks involved with stock investing in stocks with low liquidity especially the likelihood of increased volatility. Do your own research and don't solely rely on articles like this one.
Disclosure: I am long ITRN.