Security Stocks We Like and Why: Axis Communications (AXIS.ST)

Jun. 27, 2011 10:35 AM ETAXSAF
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VineSecurityJournal provides original research and content covering physical security, wireless and wired networking, and alternative energy (Greenvestor). Our research is based on financial fundamentals, plus a solid understanding of the underlying business, market, technology, competition and product development process. The journal was founded by Mitch Vine, Professional Engineer, product developer and long time investor. Mitch Vine has been actively investing for 30 years. He has held executive positions in product development and marketing for companies like IBM Corporation, Telus Mobility and Motorola plus he's helped several startups to analyse technology investments, markets, regulation and competition. Mitch is a graduate of the University of Western Ontario Engineering and MBA programs. He can be reached at mitchvine@securitynr.

AXIS Communications (AXIS.ST) - is the largest of the few "pure play" IP Video companies. The market for IP Video is likely to keep growing in the 25+ percent range for the next few years. Axis has been an productive developer of IP Video products, and they have continually pushed the envelope on product features and pricing.  

Company Summary

Axis Communications is a Swedish company focussed on the IP Video camera market. Although the company has other legacy products, these products now represent only a couple percent of sales.


Axis is one of the only "pure play" public IP Video camera companies. While other public companies sell IP Video equipment, they also sell legacy analog equipment and they often sell a much broader line of video products. Almost all of Axis' revenue is camera/lens/encoder focussed.

For the past several decades, cameras were typically of the analog variety. IP cameras (cameras which send all their data over Ethernet networks) have been rapidly displacing sales of analog cameras. This follows a trend which occurred over the past 20 years in computer local area networks, and in most telephone systems. As a result analog equipment sales have been decreasing, while IP sales have been growing, even during the recent recessionary years.

Most analysts believe that the IP video camera market will continue to increase by at least 25 percent per year for the next few years.

As a result of the transition to IP video, many established brand name video companies seen slower growth, or reduced revenues. Smaller companies like Axis and Mobotix which only sold IP Video equipment have experienced robust growth.

Company Position

Although formerly much smaller than the leading brand name companies, Axis has established a strong position in IP Video cameras, and grown rapidly over the past few years.

IMS Research in 2010 placed Axis in the #2 market share position of cameras overall in the 2008/2009 time, and in the #1 market share position for IP cameras.

Financial Results

Revenue growth rates (yoy) for Axis:

  Q1 Q2 Q3 Q4
2011 26%    


Revenue growth rates (year over year) at Axis have been about 25% for the past few years. In June Axis announced that they expected lower than normal growth rates in the first half of 2011. This is partly due to currency effects.

From the Axis announcement:

"Axis today forecasts interim net sales for the first half-year 2011 of approximately MSEK 1,550. This is equivalent to a sales increase of 17 percent in Swedish kronor and approximately 30 percent in local currencies.

The sales result for the half-year is thus in line with the previously communicated long-term growth expectations, but is lower than the latest compilation of the market's expectations produced by SME Direkt*.

The expansion including recruitments has continued, which combined with a stable gross margin and prevailing exchange rates means that the operating margin for the first half-year is expected to amount to approximately 13 percent.

"Axis operates on a market which is expected to have a growth potential of 25 -30 percent in the coming years. At times, Axis' sales of network video products will be irregular in the short-term, but there is good long-term potential for continued positive growth in the network video field", says Ray Mauritsson, President of Axis Communications.

In our pricing model, we assume that the average growth for Axis decrease to 15% for the 2011 year and returns to 25% growth for 2012, and 2013. For subsequent years, we've estimated long growth rates for Axis in the 15% range.

We've assume after tax net profit rates will dip slightly in 2011, and continue in the 11% range for subsequent years, consistent with recent years.

Risk Assessment: Medium

We assess Axis's risk level as medium. On the plus side, they are a market share leader in a growing IP video camera market. They have been fast and effective at introducing a broad range of good quality, well priced products.

On the negative side their narrow focus on IP cameras gives them little diversification protection should that segment become more difficult. There are many deep pocketed competitors, with good brand recognition (Panasonic, Bosch, Pelco, Samsung, Sony, to mention a few) who are trying hard to step up in IP video, or the market segment growth could slow.

Our Proprietary Vine Pricing Model

We assess stocks primarily based on their fundamental value. We estimate the revenue and earnings to be generated by a company over the next ten years. We look at the riskiness of the business, look at the assets and liabilities, and we discount the value of the future earnings according to risk level. For companies with medium to high risk levels, we discount the value of future earnings a little more aggressively.

Finally, we compare the value of those future earnings to the stock price. Are the shares "on-sale" – or are they expensive?

For Axis we believe that the Q2 "glitch" will be temporary and that the company will return to more typical revenue and profitability growth in future quarters. Plugging these assumptions into our pricing model, we conclude that Axis stock is a buy at 115-130 Kronas.

Conclusion – Axis stock is "on-sale" in the range of 117-130 Kronas.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:AXSAF over the next 72 hours.
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