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Lantronix (LTRX) is a vendor of secure connectivity solutions for machine-to-machine (M2M) communications. Examples of M2M products include remote controls, computer routers and car sensors. Recently, the company's biggest investor led a major management reshuffling. Kurt Busch has taken the role of CEO. He comes from Mindspeed Technologies with a strong background in new product development. Many of his past colleagues have joined Lantronix to help turn around the corporate culture. With an almost-entirely new management team in place, LTRX is taking an aggressive approach to leverage the untapped potential the company has amassed over the years.

LTRX plans to unlock the value of its proven IP foundation, starting with a commitment to launch one new product each quarter. Management emphasized the great deal of technology within the company which can very quickly be monetized in future versions of existing products, as well as the development of new products.

After a few short quarters, the company's momentum is readily apparent. In the first six months under new management, LTRX launched four new products, including the immediately successful "xPrintServer - Network Edition". xPrintServer enables wireless printing from any iPad, iPhone or iPod to virtually any network printer. Since its launch, the company has attracted channel partners to boost product sales.

The company also achieved non-GAAP breakeven results in the past quarter. Management expects to maintain this level of profitability as long as it continues to generate $11 million in quarterly revenue. Focused spending on R&D, lower spending on SG&A, higher margins, and a reduction in inventory all show that the company is becoming efficient. With continued profitability, it can also start to monetize its substantial NOL balance.

LTRX differentiates itself from competitors via ease-of-use. Its plug-and-play products bring networking to machines for people that are not networking savvy. At present, M2M market penetration is in its infancy (only about 1%). Analysts estimate that there are over 50 billion connectable machines today. With the explosive growth in smart phones, cell phones, tablets, sensors, and other devices, LTRX has positioned itself to capitalize on the growing demand in the M2M connectivity market. Taking their share, the company expects to expand its tangible market by over 4x with new products, gains in current segments, and reorganized resources.

On its last earnings call, LTRX's CEO stated, "Looking forward to the coming quarters, we expect to release our first device servers with cellular interfaces, our first analog or censor device servers, new members of the xPrintServer family as well as additional new members of current product families."

LTRX's founder and newly appointed chairman of the board, Bernhard Bruscha, has a substantial vested interest, as the beneficial owner of TL Investment GMBH, which owns over 40% of LTRX. After completing a secondary offering and private placement, the company now has the working capital it needs to execute its strategy. Last quarter, this was an issue. Specifically, LTRX has struggled to get priority status with its contract manufacturers, due to a high level of payments due to those partners. LTRX also failed to meet market demand for xPrintServer due to a lack of cash to finance higher levels of production.

Management expects both issues to be resolved. However, investors should remain vigilant. Lantronix is a small company with a history of poor execution. New management promises to change that, but promise and reality are two very different things. In addition, the M2M space is attracting larger competitors, not the least of which is Sierra Wireless (SWIR), which has established a firm foothold in the automotive market.

SWIR is turning out to be a great success story in the M2M space. After bottoming out at $6 in December, the company reported stellar earnings results. It also provided an bullish view of it future, and that of the M2M market. It's shares have since rallied by 50% and barely lost any ground in the midst of the stock market's 13% correction.

For smaller vendors like LTRX, M2M represents a vast greenfield with ample room to carve out a niche (or attract an expanding suitor like SWIR). Further, LTRX's valuation provides a relatively low level of risk as compared to its opportunity. Despite improving fundamentals, its shares are still trading well below the price institutions (including TL Investment GMHB) paid in the company's last round of funding.

The company now holds $11.25 million in cash, a book value of around $12 million, and an enterprise value of approximately $16 million. Meanwhile, LTRX is on pace to generate about $45 million in annual revenue for its fiscal year, ending June 30. So, LTRX's enterprise value is one-third of its annual revenue. At just 1x revenue, the stock would be more than a double from current levels. Viewing its valuation from the standpoint of technological prowess, the company holds 19 patents and has several more in process. This is primarily due to its $7 million annual investment in R&D. This works out to an EV-to-R&D ratio of less than 2. Traditionally, anything under 3x R&D has produced strong rewards for investors with patience and a willingness to take a leap of faith.

Management has set expectations for sales to show mid-teens growth over the next 1-2 years. Simultaneously, management expects non-GAAP net income to reach 3-6% of revenue. In the first half of 2012, this figure was negative 6%. Doing the math, managements comments suggest that revenue should approach $60 million in the fiscal year ending June 2014. With 3-6% flowing to the bottom line, earnings could be as high as $3.5 million (upwards of 24-cents of EPS).

With about 25% of incremental revenue falling to the bottom line, EPS could still be growing at a 50% annually at that point. With a P/E of 25 (a PEG ratio of just 0.5), 24-cents of EPS would justify a $6 share price, more than three times where it trades today.

Accordingly, Pipeline Data believes that shares of LTRX are poised to triple.

Source: Shares Of Lantronix Are Poised To Triple