TeleNav Inc. Is A Graham And Dodd Opportunity

| About: Telenav, Inc. (TNAV)

TeleNav (NASDAQ:TNAV) 8/13/13 Close $5.67


TeleNav, Inc. specializes in vehicle navigation software. It has three main end markets - auto, feature phones, and smartphones. Its feature phones end market is contracting due to the introduction of free navigation through Google Map. Consequently, the fabulous growth in auto and smartphones end markets is obfuscated by the declining feature phones market. At current valuation, we believe TeleNav offers an attractive asymmetric risk/reward profile and it is likely to return to growth within the next few quarters.


· Auto and smartphones are rapidly becoming the main drivers of TeleNav's growth - as of last reported quarter, feature phones are roughly half of TeleNav's sales. The other half is comprised of auto and smartphones. This is up from 9% of the sales only 4 years ago. Sales from auto and smartphones have been growing at close to 40% annualized rate for the past three years. At this rate, TeleNav will return to top line revenue growth within the next 4 quarters.

· TeleNav is a highly attractive acquisition target to acquirers such as Facebook, Yahoo, or a fixer-upper private equity fund - TeleNav's smartphone solution is very similar to one offered by Waze, which Google spent nearly $1 billion to acquire. To put this into prospective, TeleNav's market capitalization is only $225 million. Google could have spend a quarter of the money to acquire TeleNav's smartphone navigation solution and receive the rest of TeleNav's business for free. It gets better - TeleNav has close to $4.7 on its balance sheet. From an acquirer point of view, he/she is only paying $1 for the underlying business.

· Share buyback - Over 80% of its market cap is comprised of cash, TeleNav has ample capacities to accretively buy back its shares. It has done exactly this - it bought back $26 mil in FY13 and $12.5 mil in FY12. Its share buybacks signal that the management is confident that TeleNav will return to profitability in the near future and the business itself can generate enough cash to fund its transition from a feature phone focused company into an auto/smartphone focused one.


· Google (NASDAQ:GOOG)/Apple (NASDAQ:AAPL) could enter the auto end market - including TeleNav, none of the navigation software companies has unique proprietary technology that will prevent others from entering the auto market. In this type of competitive situation, the market is large enough for multiple vendors to coexist. TeleNav has the incumbent advantage of being integrated into the Ford (NYSE:F) Sync.

· Customer concentration - In its most recent quarter, Ford was 40% of TeleNav's revenue. Sprint (NYSE:S) and AT&T (NYSE:T) were another 38%. Its Sprint and AT&T revenues are expected to shrink over time because they are coming from feature phones. Its Ford relationship is instrumental to its transformation. Ford has signaled its commitment to TeleNav by spending $20 mil on integration TeleNav into its Sync in-dash console technology.


If TeleNav is successful with its transition, our financial projection suggests that TeleNav can return to its $0.80/share earnings power within the next two to three years. Adding back its cash and applying a conservative multiple of 10, TeleNav's share can be worth $13. On the flipside, if TeleNav's transformation plan falls apart, it is likely to worth at least its cash value or $4.7 because it can monetize its patent portfolios and use the proceeds to pay for the wind down cost.

Quantitative Stock Selection Methodology

TeleNav first came to our attention when our Graham Dodd's Net Net Plus quantitative strategy signaled the stock for inclusion. Graham Dodd's Net Net Plus strategy looks for companies that are selling at close to liquidation value. It improves upon the classic buying at close to liquidation value strategy by avoiding companies with deteriorating operating trends and tell-tale signs of being a fraud.

Income Growth Advisors offers a suite of quantitative strategies that seek to provide exceptional return profiles with less than market risk. We use empirically proven systematic investment strategies that take advantage various medium/long term market inefficiencies, and combine them with a rules based risk mitigation overlay. Examples of strategies include finding temporarily ignored companies with improving fundamentals, high quality companies that are selling at discounts to their intrinsic value, and inexpensive companies that are increasingly being recognized.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The data and information presented is for informational purposes only, and is not offered as a basis for trading in securities. Potential investors should conduct their own independent investigation before making any investment or business decisions with respect to TeleNav or other securities presented on this or our website. The data being presented was obtained from sources believed to be accurate, but Income Growth Advisors, LLC and its affiliates cannot and does not guarantee the accuracy of these sources. Income Growth Advisors, LLC and its affiliates may have positions in TeleNav and may trade in and out of TeleNav without informing anyone.