The market is on the verge of valuing the LoJack (LOJN) business at close to zero. With a stock price near $3.00 its market capitalization is $54.0 million while its net cash position as of March 31, 2012 was $34.6 million, leaving it with a current enterprise value of a measly $19.4 million. Can a 25 year old business with such a dominant competitive position and leading brand awareness really be worth that little?
LoJack is of course the leading vehicle recovery service in the industry with millions of installations on the road today. The North America business is largely dependent on new car sales in which a LoJack system is usually included in the total car price and is therefore typically a financed product. So there are issues with consumer credit availability as well. The company's key competitive advantage is the embedded nature of the LoJack system with law enforcement organizations around the country. This includes local, state and federal authorities in which Police Tracking Computers are installed in law enforcement vehicles, helicopters and airplanes.
Although the LoJack system is available in many European and South American countries, it is primarily under a licensee or product sale model in these regions. The only country in which LoJack owns and operates a complete system is in Italy. The company had been building out the sales and service infrastructure in recent years, just in time for the European economic crisis. Although the company says revenues and subscribers are still growing in Italy, it is well below expectations and they are likely not earning a positive return on capital at this point. The rest of Europe is struggling as might be expected and experienced a 13% revenue decline in the first quarter. International revenues represented about 18% of total company revenues.
One area of strong growth expected for LoJack is in the non-vehicular market. This includes items such as cargo containers and laptop computers. Lojack entered into a licensing agreement with Absolute Software (ALSWF.PK) which enables the software company to market a product that provides trackable security for portable computers called LoJack For Laptops. Another promising area is SafetyNet, a service that tracks and rescues people with cognitive disorders such as Alzheimer's, autism and dementia. This system uses a personal locator bracelet that can be tracked 24 hours a day. These new growth areas represent less than 5% of total company revenues at this point, yet are not dependent on the cyclical auto and construction markets.
From a financial perspective, the company expects mid-single digit revenue growth in 2012. This is derived from strong domestic unit sales as the auto market continues to recover and a decline in international revenues due do the troubled economic environment in many European countries. I expect the company to be cash flow positive in 2012 so a cash burn rate is unlikely unless the domestic economy deteriorates significantly enough to affect the new auto sales market.
Long-term trends are positive for the company especially when looking at potential consumer demand for new cars. The scrappage rate for old cars is expected to average around 14 million cars in the near-mid term. The scrappage rate is the number of cars retired from service every year, in other words, sent to the junk yard or crusher machines. In addition, the average age of cars on the road is almost 11 years, which is an all-time high. The other non-vehicular markets for LoJack, although small contributors at this time, are expected to be meaningful revenue generators over the long-term and provide benefits of strong growth as well as product diversity.
So although the company certainly has its challenges, it appears that the company with approximately $150 million in revenues and $9.0 million in EBITDA is worth more than $19 million. I think company executives would agree with that premise as during May of this year, the CEO and CFO were buying shares in the open market at prices ranging from $2.96 to $3.13.
Disclosure: I am long LOJN.
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