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Investors in CalAmp (NASDAQ:CAMP) are having another great year after the developer of wireless data technology and satellite solutions reported a very strong third quarter earnings report.

Shares have already tripled in 2013 following a very strong performance in 2012 already. With the market valuation approaching a billion, after shares more than fifty-folded from levels in 2009, it is time to be a bit cautious.

Third Quarter Results

CalAmp generated third quarter revenues of $63.5 million, which is up 43% on the year before. Revenues came in ahead of the company's own guidance of $59 to $63 million.

The company reported earnings of $4.2 million which is unchanged compared to last year. Given the dilution of the share base over the past year, earnings per share fell by two cents to $0.12 per share. Previously, the company guided for third quarter earnings of $0.07 to $0.10 per share.

CalAmp notes that non-GAAP earnings came in at $8.2 million or $0.23 per share. This is up six cents compared to a year earlier.

CEO Michael Burdiek commented on the performance, "CalAmp is on-track for a very strong second half of fiscal 2014. During the third quarter, Wireless Datacom segment revenue increased 37% year-over-year."

Looking Into The Results..

Third quarter revenue growth was very solid with reported growth rates of 43%. Wireless Datacom revenues were up by 37% to $49.7 million while reported Satellite revenue growth was very impressive at 72%. Note that Satellite revenues totaled just $13.8 million.

The solid growth was accompanied by margin growth as well. Gross margins came in at 33.1% of total revenues, up a 140 basis points on the year before.

These margin gains were undone by increased operating expenses which were up by 160 basis point to 23.6% of total revenues. Notably selling expenses as well as an impairment charge were the factors behind the margin compression.

While reported GAAP earnings were flat, this is the result of the fact that CalAmp paid "normal" income tax rates, compared to a negligible tax bill last year.

..And Looking Ahead

Wireless Datacom revenues are expected to increase solidly on a sequential basis, based on core growth and the contribution from recently acquired RSI.

Satellite fourth quarter are seen much lower on a sequential basis, due to the normal quarterly fluctuations. This disappointment will more than offset the growth in wireless Datacom revenues.

Fourth quarter revenues are seen between $60 and $63 million. GAAP earnings are seen between $0.08 and $0.11 per share, while non-GAAP earnings are seen between $0.19 and $0.23 per share.

The guidance came a bit soft. Consensus estimates stood at earnings of $0.24 per share on revenues of $63.1 million.

Valuation

The company ended the quarter with $31.1 million in cash and equivalents. Total debt stands at just $2.2 million, resulting in a comfortable net cash position.

Revenues for the first nine months of the year came in at $176.1 million, up 33.2% on the year before. Earnings came in at $8.7 million which is 27.2% lower compared to a year before. At this pace, annual revenues are seen approaching $240 million, while GAAP earnings are seen around $12 million.

Trading around $26 per share, the market values CalAmp at $925 million. This values operating assets of the firm at around $900 million. As such, operating assets are valued at 3.8 times annual revenues and 75 times expected GAAP earnings.

The company does not pay a dividend a the moment.

Some Historical Perspective

Very long term investors in the firm have seen a great deal of volatility. In two separate spikes shares approached levels around $40 per share in the mid-nineties and during the internet bubble.

During the financial crisis of 2009, shares had fallen to lows just below $0.50 per share, marking insane returns for buyers at those days, given that shares currently trade at $26 per share.

Between 2009 and 2013, CalAmp is expected to more than double annual revenues approaching $240 million this year. After reporting losses, CalAmp has reported earnings in the past two years, followed by another year of expected earnings in 2013.

Investmnt Thesis

CalAmp's investors were a bit surprised by the report, not sure if it was good or bad news. The uncertainty resulted in share trading in a wide $25 to $30 trading range in the first two trading days of he last week.

The guidance for fourth quarter revenues of $60-$63 million was causing some doubt after the blowout quarter. At the midpoint of the range, revenues are is seen up 27.2% on the year before, after revenues rose by 43% in the third quarter.

In fact, revenues are expected to fall by 3.1% on a sequential basis at the midpoint of the guidance. This compares to 9.3% sequential growth in the fourth quarter of 2012 versus the third quarter of that year.

A significant portion of the strong results are the result of the satellite operations, in which CalAmp typically foresees quarterly revenues of $10 million, plus or minus a few million. The reported $13.8 million revenues in the third quarter was very strong, causing difficult sequential comparisons for the coming quarter.

CalAmp remains optimistic about the firm's long term prospects being positioned for the major growth trends towards M2M, which is rapidly gaining momentum. In essence M2M connects any sort of device through a cloud-based communication network, powered by software applications which boost efficient operations.

In fact, an estimated 10 billion devices are being connected right now, which is expected to grow to 50 billion machines by 2020. Cheaper and more powerful 3G/4G/LTE connectivity, and an upgrade of legacy assets and networks is boosting the potential for the technology.

As such, revenue growth has been solid and is expected to continue, warranting shareholder interest. Yet the profitability of operations remains subdued while relatively low gross margins don't leave much potential for operating leverage. As such, I remain careful with the valuation approaching a billion after very strong momentum this year.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: CalAmp - Too Strong Momentum On The Back Of Significant Potential Growth