How CalAmp's Growth In Multiple Verticals Will Boost Its P/E Multiple

| About: CalAmp Corp. (CAMP)

Over the past twelve months CalAmp Corp (NASDAQ:CAMP) has morphed into a growth story with multiple aspects of its business reaching simultaneous inflection points. On the heels of introducing over 30 products during the past two years, with most of them in their higher-margin wireless division, CalAmp's management has successfully positioned the company to grow right through the current economic morass. While most companies are struggling to grow their sales and earnings, CAMP recently posted its best quarter in years.

More importantly, with its public safety, international and satellite verticals all inflecting at once, CalAmp was able to provide better-than-expected guidance for the next two quarters. Providing forward guidance for the next two quarters is a first for the current management team and perhaps the most telling sign of just how confident they are in CAMP's future business prospects.

You have to love a CEO that waxes confidently about its pipeline in this type of economy. Look no further than the following quote from Michael Burdiek, CAMP's CEO:

Mr. Burdiek continued, "Our backlog exiting the second quarter remains robust and we have a healthy pipeline of new opportunities supporting a good tailwind as we enter the second half of fiscal 2013."

While the company was expected to showcase strong order growth and revenues for its burgeoning Positive Train Control (PTC) opportunity within the railroad vertical, management surprised investors with its upbeat tenor in relation to two areas of its wireless business that most investors (including us) had not given much attention to: Public Safety and International Wireless.

With its addressable markets increasing from just over $2 billion in 2011 to as much as $4 billion by 2014, CAMP has multiple levers for continued growth. Most recently, the company has seen budding growth take shape with the nationwide LTE build-out in the public safety space. On the international side of the equation, CAMP was recently successful at forging into the South African market with a few of its newer wireless products. In particular, the company is gaining traction in South Africa with stolen vehicle recovery service providers.

CAMP was also very bullish about the continued traction it is seeing in its satellite business. Long written off by most investors, CAMP's satellite business has begun to generate higher margins than those seen over the past few years. This has only added to the company's cash-flow generation abilities as well as its ability to generate exponential earnings growth year-over-year.

According to Mike Crawford, an analyst at B.Riley who has been riding CAMP since the $3-$4 range (well done, Mike!), CAMP is on the cusp of growing its earnings to an annual run-rate of $1.00 a share by calendar 2014, with revenues approaching $50 million a quarter. Considering that the company's guidance for two quarters out is already above $45 million a quarter, we think that Mr. Crawford will be proven right, and perhaps sooner than we all think.

Based on the excellent prospects for exponential growth to materialize in 2013 in both of its most promising verticals (the railroad and insurance verticals), we expect the company's shares to attract new institutional investors. While management has begun to sell a very small portion of its holdings, insider selling is hardly a concern. After all, they deserve to take some profits themselves for a job well done. Hat-tip to Michael Burdiek and Co.

Ultimately, we see the transition of CAMP's shares from value-oriented holders to more growth-oriented holders as a major catalyst for the stock as we move into the end of this year and particularly into 2013. Over the past two quarters, institutional fund sponsorship has more than doubled to over 100 funds long the stock. We expect this number to trend higher with a dearth of organic growth stories available in the market.

With less than 30 million shares outstanding, CAMP's shares could double from current levels over the next 12 months as new institutional investors expand the current P/E to levels typically afforded most other growth companies. Currently B. Riley is estimating earnings of $0.78 a share for fiscal 2014 for CAMP. Assuming that earnings come in closer to the $0.85-$0.90 range and apply a 20x P/E, you get a $17-$18 stock.

Of course there are risks with every stock and this is also the case with CalAmp. If the U.S. economy were to sink back into recession next year, forward estimates may not be achieved. Also, it is still a relatively illiquid stock, trading about 200,000 shares average volume. Investors should therefore be cautioned to use limit orders when buying into the stock.

Disclosure: I am long CAMP. 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.