LRAD Is A Game Changer

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About: LRAD Corporation (LRAD), Includes: EVBG
by: Sergio Heiber
Summary

LRAD is a game changer because it is the only company that combines voice and digital communication in a single platform for public safety systems.

The company is taking market share from its competition but sells at lower multiples.

There is practically no one else in the global acoustic hailing device market which was the company's original product line.

LRAD Corporation (LRAD) has historically been an acoustic hailing device ("AHD") company. A year and a half ago, LRAD acquired Genasys Holding, a provider of location based mass messaging solutions for emergency warnings with the intent of offering a complete mass notification hardware and software solution. The acquisition made LRAD a game changer. LRAD is currently the only company able to provide a public safety system that combines unified voice and digital communications in a single platform. Other companies offering public safety solutions must combine their platform with the platform of at least one partner in order to offer a complete system. LRAD is now able to compete on its own for public safety systems while no one else can.

The company introduced its public safety solution about a year ago and has already won a Federal Emergency Management Agency ("FEMA") sponsored contract in Puerto Rico as well as in California cities. More public safety wins will come. LRAD expects to beat out its competitors in the U.S. as contracts come up for renewal as well as gain new system awards. LRAD's single platform solution provides ease of use for the customer, which competitors cannot match.

LRAD has taken its first steps into selling complete mass notification systems and its origins in AHD sales are booming but the stock price has been declining. Despite three consecutive profitable and record breaking quarters, the stock has been selling off, now about 25% below its 52 week high. There is no correlation between the company's financial performance and the stock price performance over the last month. From my perspective, it's an ideal time to add shares or start a new position. In this article I will present why I think LRAD has yet to be recognized by the market.

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YCharts

Mass Notification

LRAD is a newcomer to the industry but is a gamechanger. Take a look at any mass notification industry outlook and you will read about double digit growth over the next few years. LRAD is the one and only complete solution company but isn't mentioned in any study that I looked at. Mordor Intelligence mentions that the industry is highly concentrated among a few players, as does OMR Global, and Transparency Market Research that mentions AtHoc, Inc., Everbridge, Inc. (EVBG), Eaton Corporation Plc. (ETN), Honeywell International, Inc. (HON), International Business Machines Corporation (IBM), Siemens AG (OTCPK:SIEGY), and Metis Secure Solutions as the dominant players. Some of these companies are large conglomerates and are involved in mass notification in partnership with other companies but mass notification is not a large portion of their business. Others are private companies. Only EVBG seems to be a good comparison for LRAD, although it is a much larger company and offers a wider variety of products.

LRAD EVBG
Market Cap $112 M $2.8 B
Price to Sales 3.9 16.0
Price to Book 2.93 12.64
Price to Earnings 285 -----
Forward P.E. 26 ------
Gross Profit Margin 49% 68%
Net Margin 1.29% -26%
Current Ratio 6.04 2.40
Quick Ratio 4.69 2.40
Institutional Ownership 50% 2%
Inside Ownership 4% 99%

Source: Seeking Alpha

Clearly LRAD is cheap on a comparison basis to EVBG. I want to point out that it's not easy to find a high growth, profitable company in the micro-cap space with no debt, a high percentage of institutional investors and growth with zero share dilution. LRAD is all of that.

EVBG is obviously a much larger company and is well covered here on SA with bullish, neutral and bearish presentations. I've been the only SA contributor on LRAD for a few years. I believe that just as you will start seeing LRAD mentioned in future mass notification forecasts, you will see LRAD get more attention and fresh eyes across the investment world including here on SA. It's time to recognize that LRAD is no longer the lumpy hardware company but a company set to sweep up the demand for mass notification systems.

California's state budget for 2019-2020 has allotted $918 million for Emergency Preparedness, Response and Recovery. So far, LRAD has won three awards in California and expects many more, including winning expiring existing contracts from its two U.S. competitors, as CEO Richard Danforth mentioned in this recent investor conference.

North America has been the major market for mass notification but global demand is growing. The European Union has mandated that all members have a working mass notification system by June 2022. LRAD is a potential winner of several European countrywide mass notification systems to complement its current Australia countrywide system. The Natural Disaster Management Authority of India has initiated a cyclone warning mandate similar to Japan's Tsunami alert system.

Acoustic Hailing Devices

Looking at industry forecasts for acoustic hailing devices, we see healthy outlooks and LRAD mentioned at the top of every report such as from Reports and Reports, Marketwatch, and Perfect Herald. Mr. Danforth has told me in conversations that there is virtually no competition for LRAD in AHD and it is evident that demand is huge and promises to continue.

Sales to the U.S. Army have been briskly growing.

2016 $1 M
2017 $6 M
2018 $11.7 M
2019 $20.2 M

Source: Investor Presentation

The U.S. Army AHD award is exclusive to LRAD. It is worth about $110 million and runs until 2024. There remains 60% of the contract's value for LRAD to receive over the next five fiscal years. LRAD has also received purchase orders from the U.S. Navy and Coast Guard, the Canadian Navy and recently a new customer from Asia Pacific.

Company Strategy

Mr. Danforth has positioned the company to become the dominant player in mass notification. LRAD is a relatively new player as a full service solution and has initial success. I look for LRAD winning expiring contracts over its competitors as a clear signal that the game has indeed changed. I think we will see that develop in California very soon.

Genasys provides about $2 million in recurring revenue, predominantly from its Australian mass notification system. The Puerto Rican and California systems will add higher margin recurring revenue as will future system sales.

With a growing customer base and five years remaining on the U.S. Army contract, lumpiness in AHD sales is not in the cards for the foreseeable future.

The company has no debt and $15 million in cash. Mr. Danforth has told me as well as in response to a question at the recent Gateway conference that he is interested in acquiring a complementary software or sensor company. That type of acquisition would accelerate LRAD's long term growth.

Risk

Small caps are a true measure of our economy as 80% of Russell 2000 company earnings are domestic. Our current economics are being tested due to trade wars and political uncertainties which will only have positive effects on LRAD's future.

LRAD has secured long term U.S. Army contracts, expanded its hardware sales and is just beginning to penetrate mass notification and future recurring revenue. I see this as a low risk, high return play but note that small cap growth stocks seem to be out of favor at this time.

There is one insider that has been selling but he's almost done.

Conclusion

LRAD is on its way to the best year in its history. Institutions have taken a large position while individual investors have not yet learned to trust that the company is on the right path. I see this stock as a gem due to its high growth, low debt, high institutional interest and commanding industry position.

Hardware lumpiness won't be experienced in the foreseeable future and system sales are just beginning. The company has only been a complete mass notification solution provider for a short time but it's in a better position to capture market share than any of its competitors by offering the only one platform solution.

I've covered valuation on previous recent articles and in this article demonstrated how cheap LRAD is relative to its largest publicly traded competitor. The recent sell off seems unwarranted and presents an opportunity to add shares or initiate a position.

LRAD is dominant in AHD sales and is poised to be the dominant player in the public safety notification industry.

I write about small cap stocks and welcome discussion.

Disclosure: I am/we are long LRAD. 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.