In the middle of August, I published an article on I.D. Systems (IDSY) called "I.D. Systems: Recent Changes In Volume Traded Augments Appeal". This provided investors with a broad overview of IDSY's fundamentals, historical risk metrics involved with holding period returns, and forward looking valuation metrics. By projecting IDSY's cash flows forward and using the enterprise valuation method for forecasting purposes, I approximated a conservative share price estimate of six dollars. Below in figure 1, you will see IDSY recently just crossed that six dollar estimate at the beginning of October.
Figure 1: IDSY Price Graph
In this article, I am going to outline some of the current topics discussed at the recent conference IDSY participated, discuss revenue specific growth estimates for both the firm and industry as a whole, and last conclude with additional forward looking valuation metrics in support of IDSY's growth potential. To receive additional background information on company fundamentals please visit my previous article "I.D. Systems: Recent Changes In Volume Traded Augments Appeal" or IDSY's company website.
IDSY's Presentation, September Conference
On September 27th, IDSY presented at the Craig-Hallum 3rd Annual Alpha Select Conference, where the company discussed most recent financial reports and operating reusults, as well as some forward-looking prospects of its wireless solutions for tacking and managing industrial vehicles, rental fleets, and transportation assets. Here are some of the key points that were addressed at the conference:
"Assets addressed. Industrial vehicles include all classes of lift trucks, pallet jacks, tow tractors, and other material handling equipment."
"Issues addressed. Manufacturing and distribution operations typically have a site-centric focus on industrial vehicle activity, with limited or no ability to apply a "live," comparative view of material handling asset performance across the enterprise."
"Value provided. I.D. Systems Analytics provides holistic visibility and analysis of enterprise-wide industrial vehicle activity, enabling management to make more informed, effective decisions, raise asset performance standards, increase productivity, reduce costs, and enhance safety. Specifically, I.D. Systems Analytics (1) quantifies best-practice enterprise benchmarks for industrial vehicle utilization and safety; (2) reveals variations and inefficiencies in material handling activity across both sites and geographic regions; (3) identifies opportunities to eliminate or reallocate vehicles, with full enterprise awareness, to reduce capital and operating costs; (4) helps balance vehicle mix and informs decisions on rentals vs. leases vs. capital purchases; (5) uncovers activity trends over time to forecast material handling asset requirements; and (6) enables performance comparisons to broad, industry-specific benchmarks."
"Unique database. As one of the world's leading providers of wireless systems for managing industrial vehicles, I.D. Systems has accumulated a vast database of historical asset activity-from more than 50,000 vehicles, over a long period of time, across diverse facility types and industries. The unique depth and breadth of this data enables customers to compare general industry and facility-type benchmarks to the performance of their own sites and enterprise."
"User interfaces. I.D. Systems Analytics features 18 primary, pre-built dashboards based on more than 80 key performance indicators. User can click through the dashboards for progressively deeper data details. The data can be delivered to mobile devices as well as computers."
"License options. I.D. Systems offers three different Analytics licenses: (1) the Basic license sends reports to users automatically; (2) the Standard license provides a comprehensive suite of interactive dashboards; and (3) the Professional license enables advanced users, such as database administrators and analytical industrial engineers, to customize data extracts and presentations."
Analyzing Growth: Firm Specific & Industry Wide
Since 2009, IDSY has experienced significant growth. After more than doubling its revenue from 2009 into 2010, it still was capable of increasing it by about another 50% in 2011. Currently for this year, IDSY has turned over $9,810,000 and $8,680,000 in revenue for Q1 and Q2 respectively, which combined totals to approximately $18,490,000. With an end to Q3, and with Q4 beginning I have made estimates for 2012 FY and using similar growth rates made a very conservative revenue approximation for 2013 FY. Below in figure 2, you will see the highlighted estimates.
Figure 2: IDSY Revenue Projections
My 2012 FY estimates predicts a 26% upside in revenue from FY 2011, which seem relatively accurate considering the order made by Avis Budget Group of 20,000 units was moved from Q2 to Q3. My 2013 FY estimate is very conservative and implies continued growth at the same rate. After Q3 & 2012 FY financials & operations update are released it will be far easier to approximate growth into FY 2013.
IDSY is operating in a growing industry. The demand for products is on the rise and is beginning to show as their market share in the industry is continuing to increase. According to an article from Business Fleet, the room for growth industry wide is tremendous. Here is an excerpt from the article:
"About 5.5 million GPS/wireless devices are currently used to manage fleet vehicles, trailers, construction equipment and mobile workers, according to a C.J. Driscoll & Associates study. The 2012-13 Mobile Resource Management (MRM) Systems Market Study predicts by 2015, this market will expand to more 9 million units and annual hardware and service revenues will grow to over $3 billion. Growth is strongest in the local GPS fleet tracking market, which is expanding at a rate of 15% to 20% per year. In the trucking sector, proposed government regulations may result in a significant expansion in the use of electronic on-board recorders, which are telematics solutions for monitoring driver hours of service."
The Corporate Valuation Model Speaks for IDSY
Analysts coverage on IDSY has remained the same. There have been no downgrades and changes in price targets are still ranging from $8 to $15 per share; however, the question that I am going to answer is what is an accurate estimate of the intrinsic share price for FY 2013. Below in figure 3, you will see that I used the corporate valuation model to approximate what IDSY will actually be worth based on their operations and investments in operating capital.
Figure 3: The Corporate Valuation Model
Above in figure 3, you will notice the inputs used in the model are listed in the first four cells. In order to come to a fair consensus in what inputs should be used in the model, I first took the arithmetic average of different free cash flow estimates for FY 2013. Next, for the growth rate I used a projected average that is firm specific and lastly I used the most recently reported weighted average cost of capital figure. In order to derive the value of operations estimate for FY 2013 I divided the FCF projection by the difference between the weighted average cost of capital and the growth rate. The rest of the model just involves basic order of operations with the corresponding items above taken from the balance sheet. The end result was an 2013 FY estimated intrinsic share price of $10.57.
While, the industry outlook remains strong and IDSY continues positive upward momentum, there are potential risk investors need to watch out for including: industry growth and demand fluctuations. Here are couple items regarding both that investors should keep in mind.
- Industry Growth - The industry they currently operate in has a strong upward momentum and has high growth projection. Investors need too consider the industry as a whole and analyze upcoming potential changes that may affect IDSY's stock price.
- Demand Fluctuations - Currently, demand has increased and with IDSY's ability to take orders in advance, it allows them to lock in revenue for upcoming quarters. Investors need to keep a continuous watch on IDSY sales and be aware of any changes in customers preference for a particular product.
IDSY is a solid company with strong fundamentals that is expanding its market share within its industry. Recent performance has been excellent; expansion of sales has allowed them to take more orders and lock in revenue as we saw in Q3. According to industry studies there is significant room for growth, and specifically IDSY has appealing valuation that allows for an investment in IDSY to be a value play worth holding onto for long term growth.
Sources: All information, statistics, and financial market data was retrieved from FinViz, Google Finance, YCharts, Business Fleet, and IDSY's company website.