Sierra Wireless: Micro Cap Value Plus Growth

by: James Levy
I became a firm believer in the enormous potential of wireless technology upon using a wireless television remote control for the first time. The joy of changing channels or even turning off the TV without rising from the sofa convinced me that wireless technology would be a great investment theme for years to come.
The ongoing global build out of high capacity wireless phone networks (3G and 4G), combined with increasingly ubiquitous portable personal devices to access the internet, present wireless investors with a tremendous potential market with an unimaginable array of new applications yet to be discovered or commercialized.
In addition to the well known applications of people to people and people to machine wireless communication, just over the horizon a huge new market is emerging in wireless machine to machine communication (M2M) which promises to bring important productivity gains not only for industrial applications such as the factory floor or remote control mining operations, but also in service industry applications such as health care, food service and security.
If an investor agrees that the world will continue to go wireless in the coming years, and wants make an equity investment to participate in the growth of this sector, there are only a handful of companies to choose from which offer a pure play wireless investment. For example, the Wireless HOLDRS ETF (NYSEARCA:WMH) is loaded with huge companies such as Verizon Communications (NYSE:VZ), Research in Motion (RIMM) or Vodafone (NASDAQ:VOD), that receive most of their revenue through products and services which are not directly focused on new applications of wireless technology. Similarly, the Fidelity Select Wireless Fund (FWRLX) or the Wireless Fund (WIREX) are also heavily weighted with mega capitalization communications companies rather than true wireless companies which stand to gain the most from the growth of this technology in the coming years.
Given the limitations of the available mutual funds and ETFs focusing on this attractive investment theme, my personal quest for alpha has led me to analyze the listed companies dedicated exclusively to wireless technology in order to identify the best candidate to participate in the growth of this sector.
According to my criteria, the most attractive company among them is Sierra Wireless (NASDAQ:SWIR), a wireless communications equipment designer and manufacturer founded in 1993 headquartered in Richmond, British Columbia (Canada, for the geographically challenged). Sierra is a leading supplier of wireless data communication products, including wireless PC cards, wireless adapters for PDAs, Original Equipment Manufacturer modules for embedded applications in wireless capable devices, and resilient vehicle mounted wireless systems for truck fleets, ambulances and security services vehicles.
Last year Sierra acquired through an all-cash offer the French company Wavecom, an important provider of embedded wireless technology for the machine to machine market. This acquisition is just beginning to bear fruit now as the integration is successfully concluded. The combined company has the industry’s most comprehensive wireless data product portfolio, enjoys many long term relationships with mobile network operators and original equipment manufacturers in key markets world wide, and a widely respected research and development capability to maintain competitiveness in this rapidly evolving field.
For example, Sierra is collaborating with Telstra (TLS), Qualcomm (NASDAQ:QCOM) and Ericsson (NASDAQ:ERIC) to introduce the world’s first HSPA+ network service and devices that will function with data rates three times those of existing mobile broadband speeds. At the same time, Sprint’s (NYSE:S) new 4G mobile hotspot service requires a Sierra Wireless Overdrive device, which is being heavily promoted by Sprint. The Overdrive 4G product is creating a considerable buzz in industry circles as well as among leading edge, opinion maker consumers. Sierra Wireless will likely benefit greatly from this publicity in the coming months because the Sprint advertising clearly identifies the Overdrive device as a Sierra Wireless product
Sierra Wireless is typical of the ¨under the radar¨ and out of favor micro cap value and growth companies which are my central investment focus. Sierra has a market capitalization of approximately $260 million at this writing. With a book value of over $10, the share is currently trading in the $8 dollar range, after reaching a high of $20 per share just before the beginning of the credit crisis in mid 2007.
The credit crisis was particularly cruel for the share price of small companies such as Sierra as these companies were seen as more vulnerable to severe bank lending restrictions. Additionally, the share suffered an important decline in February of this year following its release of 4th quarter 2009 results, when EPS came in below consensus estimates, though revenues where above consensus. Significantly, the day after this earnings release, Barclay’s reaffirmed their overweight rating on the share with a $14 dollar price target, stating that they see Sierra gaining market share with their new devices and lauding the management’s steady execution which should lead to PER multiple expansion in the coming quarters. Royal Bank of Canada also maintains an outperform rating on the share with a price target of $16.
To add further credibility to its value share credentials, the company has no long term debt and over $4 dollars per share of cash on its balance sheet. The share is currently trading at less than 11 times the consensus estimated of 80 cents earnings in 2011, which represents a 33% increase over the 2010 fiscal year consensus earnings estimate of 60 cents per share.
Sierra Wireless passes all of my investment filters for a micro cap value and growth share. The management team is cohesive, highly experienced and well respected in the industry. The products are cutting edge and highly rated by industry experts and consumers. The marketplace for the company’s products is expanding dramatically, and the share itself is very reasonably priced according to value criteria. Finally, there is a high likelihood of significant earnings growth and even PER expansion in the coming quarters as the overall world economy improves, roll out of 4G mobile hotspot devices such as the Overdrive continue, and the demand for Sierra’s high margin machine to machine products increases as companies of all kinds seek to implement wireless technology to secure further productivity gains.
I personally find the $14 dollar target price to be realistic in a 12 to 18 month time frame, and am encouraged to see the number of shares Sierra held short decreasing steadily during the past month. This bodes well for the next earnings release scheduled for April 29th, 2010, which may well be the catalysts to begin a period of sustained increase in the valuation of this micro cap value and growth company.
Disclosure: Long SWIR common shares