In early 2006, CalAmp (CAMP) reported its best quarter ever. Revenues were $64.5 million and GAAP earnings were $0.23. Since this quarter, however, CalAmp’s satellite division has never been the same. After discovering problems with the laminate material on CalAmp’s printed circuit boards four years ago (a problem caused by one of CAMP’s suppliers), CAMP’s main satellite customer, EchoStar, has relegated the company to the role of a third-source supplier.
In a certain sense, DISH has kept CAMP in the penalty box ever since this product recall. Orders have been inconsistent and lumpy, weighing down CalAmp’s profitability. This has resulted in a lower valuation for CAMP’s shares, with most investors leaving this side of the business up for dead. This trend is now set to reverse after CAMP announced a significant product ramp with DISH after Wednesday’s close. With its wireless division poised to approach $30 million in quarterly revenues this quarter and a new satellite product line just starting to ramp, a major re-evaluation higher in CAMP’s shares should now begin. Let’s examine.
After converting to a variable cost structure over the past two quarters, CAMP’s break-even point for the satellite side of its business has been reduced to $8 million a quarter. On its last conference call with investors, CEO, Michael Burdiek, stated that Q4 results would see a significant uptick in sales and in profitability for the satellite unit. We now know why after last night’s press release:
CalAmp Corp. announced today that is has commenced making volume shipments of a new whole-home video and data networking product to its key North American Direct Broadcast Satellite (DBS) customer.” Michael Burdiek, CalAmp President and CEO, stated, “We are pleased with our engineering team's execution on this technically challenging product. With volume shipments now underway, we expect meaningful revenue contributions from this product beginning in this current quarter, and extending into the next fiscal year.
This is a very significant news release for a number of reasons. First and foremost, it unofficially states that CalAmp has been taken out of the penalty box by Echostar. With the success that CalAmp has been showing in its wireless division, one gets the sense that DISH needed to step up its activities with the company in order to keep CAMP interested in designing products for them. CAMP is DISH’s only U.S. supplier of its antenna/satellite products. It behooves them to keep CAMP in the fold.
With Apple TV on the way and Netflix continuing its efforts to move to a streaming-only service, we expect DISH to accelerate its efforts to provide its customers with the ability to stream content onto various TVs around the house. CAMP’s new product line does exactly this for DISH; it helps improve DISH’s competitive offerings against the likes of both Apple and Netflix:
Designed to facilitate the networking and communication of set-top boxes within the home, this new product acts as a video transport bridge throughout the whole home while simultaneously allowing for data communication using the Multimedia over Coax Alliance (MoCA) standard.
For CalAmp shareholders, the most important takeaway is that this is a significant market opportunity for the next 3-4 quarters, if not for the next few years. By beginning a multi-quarter ramp of this new product line, DISH has rewarded CAMP a significant piece of business that should now net CAMP at least $15 million in quarterly satellite revenues. This should translate to $0.02-$0.04 in quarterly profits for this side of the business. When you consider that CAMP’s wireless business should start to generate $0.08-$0.10 in quarterly earnings, a profitable satellite division will add an incremental layer of profitability to the company not seen in years.
Another important consideration for investors is this: With both sides of the business generating profits, cash flow growth is set to accelerate. Over the past few years, CAMP’s management team has performed the herculean job of reducing the company’s net debt from $28 million to a positive net-cash position this quarter. Free cash flow growth will now begin to accelerate to $4-$5 million per quarter. This could potentially allow management to unlock shareholder value by initiating a small dividend or a buyback program. With the M2M space on fire, we would not be surprised to see CAMP’s management team go on the offensive and make an acquisition that would be immediately accretive to the bottom line.
In a world awash with too much debt, uncertainty, and slowing growth, CalAmp stands out quite markedly. It is under-owned, under-followed, and the company has clearly reached an important inflection point yet to be picked up on by the market. This will change. As one of the only companies in the market currently poised for accelerating revenue and earnings growth over the next 3-4 quarters, we expect CAMP to see a meaningful uptick in institutional interest over the next 3-6 months. Currently there are only 42 funds invested in CAMP, up from 35 in Q2. We expect to see this number increase after the company reports earnings next week.
We expect to see a big boost to forward estimates for CAMP’s Q4 when earnings get released. Current estimates are too low. We expect the company to issue Q4 guidance of at least $40 million in revenues and $.08-$.10 in earnings. Perhaps this is why the company is releasing earnings two weeks earlier than they typically do? With the added visibility of a multi-quarter ramp in both sides of its businesses, it would not surprise us to see CAMP issue guidance for the company’s next fiscal year.
In a tape lacking organic growth stories, we expect the CalAmp story to resonate well with new institutional investors. Looking into 2012, we see the stock heading to $6 by the spring. Assuming the company can do $170 million in revenues for the upcoming fiscal year, even at $6 the stock would only trade for a 1X revenue multiple and a 15X p/e on $.40 in earnings. In a market where valuations are getting compressed, there is still room for an under-the-radar inflection point story like CAMP to garner a higher multiple. We think it will be one of the few names to do so. After all, as far as we see, the story has only just begun to move into overdrive.