CalAmp: Downgrading Due To Uncertainty Overload
- CalAmp's fiscal 4Q20 results were not terrible, but investors' interest in the stock slowly fazed after an initial bullish reaction.
- The secular pressures on the telematics business were magnified by the COVID-19 crisis, and margins headed in the wrong direction.
- I stay away from the stock until CalAmp has better visibility into its future operational and financial performance.
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CalAmp (NASDAQ:CAMP), one of my rare (and, in this case, unsuccessful) "very bullish" calls of the past few months, has been a disappointment. This is not to say that the company has been performing poorly. But its stock certainly has.
Shares ended the May 6 trading session up only 62 bps, after failing to hang on to more substantial post-earnings gains that reached 6.7% at one point. The top-line beat that also exceeded the high end of management's revised guidance did not seem enough to excite investors, at least not for very long. Now, CAMP sits 40% below the February peak and a whopping 70% lower than late 2018 levels.
Credit: Warrior Trading News
A look at fourth quarter results
CalAmp's $87.2 million in revenues, representing a 3% YOY increase, cannot be considered disastrous at all, especially considering the disruptions to the whole economy caused by the current health and economic crisis. Better yet, the transition from telematics to SaaS, the key pillar of any bullish case on CAMP, gained significant ground. The 60/40 revenue split is now consistent with the company's long-term target - see chart below.
The favorable revenue mix shift towards subscription services has, embedded within it, a couple of less bullish factors. First, SaaS revenues benefited more from the recent acquisitions in LoJack international than from organic growth. Second, soft demand for MRM and COVID-19-related supply chain challenges dented the performance of an already weak telematics segment.
Source: DM Martins Research, using company reports
Further down the P&L, I was once again disappointed to see gross margin dip by about two percentage points. It looks like temporary headwinds caused by the closure of the US manufacturing facility remains a factor.
As SaaS gains scale and becomes a more relevant segment, it would have been encouraging to see CalAmp head closer to its long-term consolidated EBITDA margin of 20%. Instead, as a result of timid top-line growth and compressing gross margins leading to operating deleverage, adjusted EBITDA margin of only 9% in fiscal 4Q20 decreased by four percentage points YOY.
Projecting what the revenue and margin trends will look like going forward has become harder, given the number of risks that caused the management team to refrain from providing guidance this time.
Opportunity clouded by plenty of uncertainty
Today, I am withdrawing my bullish stance on CAMP for a simple reason. Although the company seems committed to achieving its long-term goals of running a more profitable, largely recurring revenue business that could justify the stock eventually trading at $20/share per my previous calculations, the path forward has now become blurrier. If a complex transition from telematics to a SaaS model wasn't enough, the COVID-19 crisis and a change in leadership now make it even harder to predict the fate of CalAmp with much certainty.
A speculative bet on CAMP could be justified by low valuations (see graph above depicting the stock's much steeper-than-average correction in 2020) and hopes that the company will eventually get to $200 million per year in SaaS revenues and 20% EBITDA margin. It also helps that the cash burn, triggered in part by the 2018 trade wars, has stabilized despite a whole new batch of problems that the company now faces.
But I prefer to take a step back and not risk capital unnecessarily. Perhaps CalAmp will have better visibility into its operational and financial performance once the macroeconomic environment improves. At that point, even if shares have already run ahead by a few dollars, I could consider placing a higher-conviction bet on this name.
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This article was written by
Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.
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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.
He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.
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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.
DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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