Stolen vehicle recovery and fleet management services are big businesses for small companies. Ituran Location and Control Ltd. (ITRN) is an Israel-based company active in this space outside the U.S. The company provides services primarily in Israel, Argentina, Brazil and the U.S. As of December 31, 2012, the company reported 667,000 subscribers, up from 623,000 at the end of 2011. The company has a market capitalization of $327 million.
In February, the company released fourth quarter and full year results. Fourth quarter revenues grew 3.4% to $38.2 million. Of these revenues, 76.2% were from location based services and 23.8 % from product sales. For the full year, revenues decreased by 6.1% to $150.3 million. The decline in revenues is partially explained by currency exchange rates. In local currency terms, revenues grew by 4% due to an increase in the subscriber base.
The gross profit for the quarter is $18.8 million (49.3% of sales), an increase of 0.9% compared with $18.7 million in the fourth quarter of 2011. On the year, the gross profit for 2012 was $74.2 million or 49.3% of revenue compared with $79.4 million in 2011. The five-year average gross margin is 49.18%.
Ituran reported 4th quarter earnings of $0.21 per share as compared to $0.08 per share in 4Q11. Operating earnings were $8.0 million in 4Q12 versus a loss of $0.3 million in 4Q11. On the year, operating income increased to $29.9 million from $26.6 million in 2011. Net income in 2012 was $32.5 million or fully diluted EPS of $1.19. This is compared with a net income in 2011 of $21.3 million ($1.01 fully diluted).
The company has $29.5 million in cash on-hand and no long-term debt. The current ratio is 2.1. Operating cash flow was $32.5 million.
Ituran has a dividend payout goal of 50% of net profit. The current payout is 40.7% and the indicated dividend is $0.81, producing a yield of 5.2%. In 2012, the company declared a cumulative dividend of $17.2 million.
Looking to the future is a little risky as there is no guidance from the company and few, if any, analysts publish projected earnings. On the other hand, this lack of market awareness does create an opportunity. I find that ITRN is a holding of Seth Klarman's Blaupost. Klarman is among the most successful long-term value investors. In addition, the Quant Fund, Renaissance Technologies and Scott Black from Delphi Management also have positions in ITRN.
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It seems to me that ITRN is undervalued. By my estimate, the company trades with an enterprise value to EBITDA multiple of 5.69 which I consider very low. With the company's high level of profitability as measured by ROIC and CFROI, a dividend yield of 5.2% and solid balance sheet, I see a good deal of upside potential. There is some reassurance that Klarman also sees potential in this small company.