On Track Innovations: This Stock Has Nowhere To Go But Up

| About: On Track (OTIV)
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On Track Innovations OTI (NASDAQ:OTIV) is an Israeli company with expertise and patents in contactless secure smart card solutions including secure identification and payments. This company has been squandering its opportunity to capitalize on its markets and technology for years now but perhaps it was more a function of market preparedness than poor execution. Now it appears the tide may have turned and the stock is dirt cheap.

The Theme

While OTI is a small company there is a lot to like about it as an investment with strong prospects, in particular its products are well positioned to benefit from an attractive long term theme. In general my stock picking is based on performing a macro to micro analysis: First identifying an attractive long term theme/trend/catalyst (alternative fuel systems?), then filtering down through the different market participants, followed by further filtering those prospects by analyzing the individual businesses products and financials. OTI is exposed to the long term theme of virtual wallets and contactless payment solutions. More interesting than just providing the hardware and software, the company has used its proprietary technology to develop and offer full solutions to a variety of markets. This means the company not only generates revenue from the sale of equipment but also ongoing transactional revenue from the use of its products. The company is also involved in secure identification documents like e-passports and other security cards but while this will continue to generate revenues, it is a competitive field that I pin fewer hopes on. As a matter of fact I think this portion of its business would be a great divestiture to raise some cash and focus on building its contactless payment and transactional businesses.

Coming to America

In a long list of bad Eddie Murphy movies this was a good one. (Still nothing beats 48 Hours or Beverly Hills Cop.) But OTI is also coming to America with its parking technology offering, EasyPark, and that has me more excited about the stock. I live in Toronto and we long ago replaced parking meters with horrible ticket issuing machines. Those things need to go, plain and simple. First, a good percentage of the time they don't work because some gluteus maximus jams something into the coin slot or the credit card reader; or it won't issue a ticket and functions exclusively as an eyesore for crappy local bands to post their playbills on; or there is a line of people waiting on some Luddite who finds the technology too challenging - and on top of everything it's minus -15 and snowing. A payment solution that eliminates such issues would be welcome and has virtually a guaranteed future. EasyPark offers a promising solution along those lines:

The EasyPark device is an electronic in vehicle parking meter placed on the window inside the vehicle on the side next to the curb. The unit contains a visual display which allows the end user or enforcement officer to clearly see the parking details such as zones, time, credit etc. The unit can easily be recharged with parking fees at conveniently located Points of Sale (POS) terminals, or alternatively at home via the EasyPark website. The user is charged only for actual parking time.

Since 2000, EasyPark has been implemented nationwide as a complete parking solution in Israel, with over 600,000 users. EasyPark is the only parking system to date to have been field-tested and used on such a scale, and has been successfully endorsed by both municipalities and drivers. EasyPark has been a success in Israel and OTI's contract was extended in 2010 for additional five years. About 750,000 EasyPark units have been sold in Israel across 42 cities in the country, that's pretty impressive considering Israel's population totals about 7.8 million people. This is a 10% adoption rate and must be growing rather quickly when you consider that the last update on the website claimed a user base of over 600,000.

In June 2008, to expand on this opportunity, the company acquired a French electronic parking solutions company and renamed it "PARX France." This gave OTI immediate entrance into the French electronic parking payment market and EasyPark is now available in over 25 cities in France. In January 2011 the company acquired Ganis Systems Ltd., a competitor providing electronic parking solutions mainly in Europe and North America and are converting customers to the EasyPark system. EasyPark is also being marketed through local franchisers in over 20 cities in Italy and in Bermuda, and is in various stages of deployment in other cities across Europe and North and Latin America.

While having success outside North America is a good thing, in investment markets nobody really cares about anything until it makes a splash stateside. Well here it comes as OTI announced last month Austin TX is the first major U.S city to adopt the EasyPark system. This comes on the heels of its first implementation in the U.S. at the campus of UC Davis in February of 2012.

"We are excited and proud to welcome UC Davis as our first EasyPark implementation in the United States. We appreciate their leadership in deploying this highly effective and efficient solution and are confident that drivers on the campus will benefit greatly from this implementation. "We hope that UC Davis will serve as the model for additional EasyPark implementations at universities and municipalities in California and across the U.S. Similarly, given our renewed sales and marketing focus on the U.S., we look to drive expanded penetration of other OTI platforms such as Contactless Payment and Near Field Communications (NFC), MediSmart and EasyFuel, to deliver secure, turnkey solutions based on unique, high-end patented contactless technology."

This is a significant milestone and when you consider that this technology will proliferate, and in five years or so you will never again see another ticket printing meter, this represents a significant market opportunity. If we can assume a 10% adoption rate where EasyPark is deployed (which is a low ball estimate because ultimately everyone will need some mechanism to park but I'm hedging because competing solutions will certainly present themselves), there are approximately 312 million people in the U.S., so at 10% adoption there are over 30 million potential customers in the US alone.

Payment Solutions

Management's focus on providing technology solutions that result in recurring revenues seems like a good strategy and it differentiates the company from other purely component offering companies. While EasyPark is one interesting platform, OTI is also integral in MasterCard (NYSE:MA) and Visa s (NYSE:V) global contactless payment initiatives and has supplied solutions for more than 20 million cards and 130,000 readers for these programs. The company also offers Near Field payment solutions to telecom providers worldwide. OTI's COPNI NFC payment solution allows phones to be retrofit to be capable of completing secure contactless transactions. This is a necessary solution as it will be a long while before all phones come equipped with NFC capabilities embedded and this will happen at different rates in different regions of the world. NFC is expected to be a huge market. OTI's technology allows it to be an early entrant as detailed in a recent press release:

On Track Innovations Ltd., a global leader in contactless smart card solutions, today announced that MTS, Russia's leading communications group with over 100 million subscribers (with over 70 million subscribers in Russia), has chosen OTI's COPNI mobile payment solution for its near field communication ("NFC") projects. OTI is working with SITRONICS Smart Technology as its technological partner in Russia. MTS's NFC program first retail application to be launched later this month will be mobile payment and loyalty program at LUKOIL gas stations.

Oded Bashan, Chairman and CEO of OTI, commented: "COPNI is the ultimate solution for operators, providing them maximum flexibility. It is cost-effective and it allows the MNO to provide solutions to a large existing customer base regardless of the handset type and model, bringing contactless payments and NFC into real life program quickly."

This strategy is starting to show up in financial results as well. In 2011 OTI's licensing and transaction fees grew to $12.1 million or 199%, compared to $4M in 2010.

Other Catalysts

The company has a patent portfolio that includes over 100 issued patents and pending patent applications encompassing product applications, software platforms, system and product architecture, product concepts for Near Field Communications, or NFC, contactless payments, secure ID, petroleum and parking solutions. It seems the value of its NFC patents has come into greater focus recently as in March of 2012 the company launched an action against T-Mobile USA claiming infringement. As evidence of the validity and strength of its patents, in November 2011 the company secured a non-exclusive $7 million core technology license agreement from a multi-billion dollar company. The company has indicated it will continue to attempt to extract more value from its IP portfolio in the future. Investment firm C. Silk and Sons thinks there is unrecognized value in OTI and recently increased its stake in the company from 10.8% to 12.2% in what may be an attempt at a hostile takeover. From an article in Globes:

C. Silk said that it plans to replace its board of directors and CEO, and change its bonus structure for middle managers, and possibly the sale of the company or its assets if the board should be uncooperative.


OTI is well positioned in a variety of growth markets centered around its secure contactless payment technology. At the current valuation of roughly $50 million, the company trades for less than 1x revenues and has about an $18 million net cash position. You are buying shares in a business that was profitable in the most recent fourth quarter and one analyst expects the company to lose .07/share in 2012 on over $50 million in revenues.

Going forward investors have multiple catalysts to drive shares higher from a very low level including expansion of EasyPark globally and most interestingly in the U.S., expansion of its COPNI NFC retrofit solution, expanded efforts to gain licenses for its patent portfolio and litigate infringers and an activist owner that is pushing for change and potential asset sales. I think now is a good time to be long OTIV with very limited downside and the possibility of a 100% or more gain being well with the realm of possible outcomes. At $3/share, OTI's market cap would still be under $100 million while generating over $50 million in revenues and holding almost $20 million in net cash and the shares would still appear inexpensive. It wouldn't be much for another much larger NFC player like $6 billion market value NXP (NASDAQ:NXPI) or $3.5 billion Atmel (NASDAQ:ATML) to shell out $150 million for OTIV to grab its IP and customers.

Disclosure: I am long OTIV.