Frank Voisin is the author of the popular value focused website Frankly Speaking, found at Frankvoisin.com
A reader emailed me his investment thesis for Ituran (NASDAQ:ITRN). It is quite interesting, so (with his permission) I am sharing it here. If you have an investment thesis that you would like featured on this site, send it to me here.
Frank’s Disclosure: No Position. Author’s disclosure below.
Ituran: Securing Vehicles and Profits, with a Considerable Free Growth Option
Ituran (ITRN) is a leading company in its field, providing tracking and advanced protection services for vehicles and drivers. Ituran specializes in theft prevention and vehicle location, and the provision of information services, navigation and assistance while on the road. Ituran’s system is powered by a unique advanced technology developed originally to locate pilots in difficulty and later adapted for civilian use.
Since its founding in 1994, Ituran has developed a strong reputation, and is in fact the leading company globally providing tracking, protection and communication services to vehicles and drivers. Ituran has more than 628,000 customers that it faithfully serves from its service bases in Israel, Argentina, Brazil and the United States. To date, Ituran has successfully prevented or resolved the theft of more than 16,150 vehicles with a total value of more than $1 Billion. Historically, Ituran’s most important target market has been insurance companies seeking to lower costs and protect their customers.
A Quick Summary thanks to Gurufocus (click for full):
How Ituran Helps:
Press release July 10, 2012
“Refrigerated Truck Stolen and Quickly Recovered Thanks to Ituran’s Fleet Management & Recovery System
A sophisticated “chop-shop” was shut down and four wanted criminals were arrested and charged with seven felonies thanks to Ituran’s Manageit Fleet Management and Recovery System”
The first of four markets in which Ituran operates, Argentina, accounts for 124,000 or ~20% of the total. In Argentina, Ituran is one of the leading companies, doubling the number of vehicles since 2005. The US, Ituran’s smallest market in terms of units, has 25,000 accounts or ~ 4%. As a result of the price competition and market saturation, Ituran has not placed much emphasis on the US, though it is growing its presence there.
Ituran’s home market of Israel, accounts for nearly 50% of its units at 256,000. Its strong market position cannot be understated. As per their 10-K:
Under Israeli law, we are considered a “monopoly” and therefore subject to certain restrictions that may negatively impact our ability to grow our business in Israel.
We have been declared a monopoly under the Israeli Restrictive Trade Practices Law, 1988, in the market for the provision of systems for the location of vehicles. Under Israeli law, a monopoly is prohibited from taking certain actions, such as predatory pricing and the provision of loyalty discounts, which prohibitions do not apply to other companies. The Israeli antitrust authority may further declare that we have abused our position in the market. Any such declaration in any suit in which it is claimed that we engage in anti-competitive conduct would serve as prima facie evidence that we are a monopoly or that we have engaged in anti-competitive behavior. Furthermore, we may be ordered to take or refrain from taking certain actions, such as set maximum prices, in order to protect against unfair competition. Restraints on our operations as a result of being considered a “monopoly” in Israel could adversely affect our ability to grow our business in Israel.
Though there is some obvious considerations/downside to being a monopoly, they are a de facto MONOPOLY in their largest market.
Ituran has been in Brazil for nearly 12 years and is a leader in that market. Brazil accounts for 219,000 or nearly 25% of the total number of vehicles. The reason we chose to list Brazil last is it’s a unique case to value the company, and is likely a source of astronomical future growth.
Ituran’s press release:
AZOUR, Israel, April 9, 2012 /PRNewswire/ –
Ituran Location and Control Ltd. (NASDAQ: ITRN, TASE: ITRN), announced that today Ituran entered into agreement withGeneral Motors Brazil (“GMB”) through a company controlled by Ituran (51%).
According to the agreement, GMB will offer its customers immobilization, location and Telematics services for the Chevrolet range of vehicles it sells in Brazil through Ituran’s aforementioned subsidiary. The sale and the installation of the anti-theft device will not be carried out by Ituran.
New regulations in Brazil, i.e. Supplementary Law CONTRAN no. 245, provide that as of August 2012, new vehicles in Brazil shall be obliged to incorporate an anti-theft device. Since the Regulation has not yet entered into force, the Company cannot estimate at this time the effect of the agreement with GMB on its profitability and sales revenues.
Ituran estimates that the agreement with GMB is of significant importance, since once the Regulation enters into effect, it may be of substantial financial scope.
Eyal Sheratzki, CEO of Ituran commented, “This agreement with GM is an important milestone for our business in Brazil. We see significant future upside potential from this agreement once the 245 regulation becomes effective. We look forward to working with this leading global car manufacturer and we hope to build a long-term, successful and fruitful relationship with GM.”
So, CONTRAN LAW no. 245, states that all new vehicles must incorporate an anti-theft device. This includes not only cars and trucks, but all vehicles such as Class 8 tractors. In this first announced OEM partnership for Ituran in Brazil, Chevrolet and Ituran have agreed to a deal, for which Ituran will provide an anti-theft system in every vehicle Chevy produces in Brazil. While individuals have the option to activate the service component (if not activated, no service fees are paid), they must have the system pre-installed by the manufacturer (even if the vehicle is produced outside the country and brought in). This is a very interesting development moving forward.
|Top 5 Markets for Chevrolet in 2011(new vehicles produced)|
In 2011, Chevrolet produced 632,201 cars in Brazil, or a little over 100% of the total number of vehicles currently monitored by Ituran worldwide (628,000). In total, Brazil sold 3.5M cars in 2011. As one of the leading brands in Brazil, Ituran is in an incredible position to make an enormous leap in service sales in the months and years ahead.
The actual sales of the devices will be handled by a separate partnership between Chevy and the telematics manufacturing company (spun off from Ituran in 2007). This will likely serve as a sweetener to Chevy. Though profits are marginal per physical unit, Chevy has high volume as a unit must be legally installed in every vehicle; essentially providing a tidy profit for no additional work (installation will be carried out by a third party). Ituran will not participate in this aspect of the deal, but it’s a net positive as their margins will improve as lower margin business is disposed of.
Assuming that 100% of Chevrolet cars have the device and only 10% use the service, Ituran’s product sales would not increase but the service component would increase by 63,000 in 2013; and that’s excluding the almost 3M additional vehicles sold by other manufacturers which must also comply with the law.
How interesting is this opportunity?
On Wednesday March 23rd, 2011, Sascar, founded 11 years ago, and with monitoring coverage in about 180,000 vehicles in Brazil, agreed to a buyout to sell 56% of their company to GP Investments, the largest Latin American buyout firm for $101M (valuing the company at $180M). This transaction values each Brazilian customer at $1,000.
Another interesting nugget:
June 1, 2012
NEW YORK (AP) – Verizon Communications Inc. is paying $612 million for a company that provides wireless connectivity to cars and trucks.
The New York company said that it is buying Hughes Telematics Inc., which provides hardware and services for Mercedes and Volkswagen cars in the U.S. (our emphasis) Verizon Wireless already provides wireless connectivity to General Motors Co.’s OnStar service. Verizon owns 55 percent of Verizon Wireless.
Verizon is paying $12 per share for Hughes, more than double the Atlanta company’s closing price Thursday in the thinly traded over-the-counter market. Hughes stock popped $7.50 to $11.85 Friday morning. Verizon shares dipped 18 cents to $41.46.
Most of Hughes’ revenue comes from fleet management equipment and services for customers like trucking companies. Verizon said the company’s technology has the potential to go beyond the auto and transportation markets, with opportunities to grow into healthcare and products for the home.
Hughes was founded in 2006 and lost $81.2 million last year on $71.3 million in revenue. It had 374 employees at the end of 2011. Private equity firm Apollo Global Management LLC is a major investor in Hughes.
As of December 2011, Hughes Telematics had 307,000 vehicles they serviced, plus they signed a new deal with Volkswagen USA, which will add another 324,402 units a year starting in 2013. Combined, this is approximately 631,402 units at year end 2013. At the purchase price of 612M, this values each unit at approx., $1,000 each. This is for US only, which is the most competitive country. As an example of the wide discrepancy in pricing, Ituran earns (in service revenue) $273/unit in Brazil vs. $68/unit in US.
Appling the same $1,000 per vehicle to Ituran’s Brazilian customers only, would value the firm at $219M. Include the additional $17M of net cash & equivalents, and you exceed the current market cap ($233M); essentially giving the other 65%of the company away for free.
Applying the $1,000/unit to all of Ituran’s fleet would value the entire company at $628M ($30/share) or nearly 150% above the current market cap of $245M.
Let’s look some additional information:
In the latest conference call (Q1 2012), management restated their belief that they will be able to return to historic unit growth (low double digits) in the coming months and years (Q1 saw a net add of 5,000). We believe management is being conservative in their estimates. Traditionally, Ituran focused on B2B sales (mainly insurance companies) as their primary means of sales. Because of the new law, and larger pool of potential customers, Ituran has refocused on end customers such as those targeted in the GM Brazil deal; which alone could be a huge game changer.
Historically, Ituran has done an excellent job of running their business. Below is a summary of their P&L. This provides a glimpse of how management has performed. For further figures refer the company’s website or SEC filings. (Of particular interest look at Revenue, Operating Income and EBITDA%.)
USING CONSERVATIVE FIGURES AND CONSIDERING GROWTH ONLY IN BRAZIL
We believe this to be a conservative estimate going forward. We have included no growth in any other market besides Brazil and reduced both current price/user and service margins (by 10%) in order to increase our margin of safety. Only sales to Chevy are included, so we are ignoring any potential additional OEM wins.
Utilizing a basic DCF with 5% topline growth rate (below historic), we get an IV of $17. If the law gets passed, growth will be considerably higher (mid 20% CAGR is likely), however, for this exercise, using a CAGR of 15% we get a DCF IV of $32, ~200% higher than the current price of $11.
Looking at it solely from a multiple standpoint, the current P/E is 9.1. With approx. $1.44 in earnings projected for 2013, you are buying Ituran for a P/E of less than 8! With a normalized P/E of 15 (conservative for a rapidly growing company) you get a price of over $22 (almost double current price). Meanwhile you are earning considerable dividends all along the way.
However, as my favorite Benjamin Graham saying goes “The security analyst is on safest ground when favorable expectations are treated as an added reason for a purchase, which would not be unsound if based solely on past performance and present situation.” This is certainly the case here.
Excluding 1x items, Ituran generated TTM profits of $27M. That works out to a current P/E of 9.1 and an Earnings Yield of 11%. Additionally, the company is sitting on a cash hoard of $17M. Free Cash Flow (we use Buffett’s Owner Earnings) was considerably higher at nearly $32M, and using Greenblatt’s ROC ITRN averaged over 73% from 2005 to 2011; although in 2007 it averaged 24% and in 2011 22%. Ituran’s historically high ROC should remain elevated going forward as it’s not a Cap Ex intensive business.
Not to disappoint their shareholders (management owns ~50% of shares, Baupost owns another 8%), Ituran paid a dividend of $26M in 2011, which yielded ~8.5%. Furthermore, at year-end 2011, Ituran changed company policy so that dividends will be paid out quarterly and be equal to at least 50% of profits. In Q1 2012, Ituran paid a $2.6M dividend on just over $5M in profits.
Sales and profits in the most recent quarter (Q1 2012) were down YoY, although the majority of that is due to the strengthening of the dollar versus other major currencies (excluding currency effects service revenues would have increased YoY). However, even with a slight decline in sales, the total number of units serviced increased, in what was a pretty tumultuous environment; this should continue to bode well for the future.
So with zero growth, you are getting an earnings yield of 11% a dividend of at least 50% of profits, and a free option on potentially considerable growth in Brazil, the world’s 4th largest car market.
Now none of this comes without some risk:
There are obvious risks involved. Europe and China are witnessing some considerable volatility in their economies. The US is only starting to recover (although the car aspect of the economy is growing quickly). Israel is always one foot into some sort of regional conflict, and Israel, Argentina, and Brazil’s economies have considerable exposure to Europe, China and the US. The currency factors are also of some concern as the company reports in dollars and the US is its smallest market. Any additional strengthening of the dollar will continue to weigh on sales.
There is competition in every market in which Ituran operates. The new regulation in Brazil will likely only result in increased competition as new entrants come to market. This will put added pressure on prices but we have discounted our estimated revenues by ~20% to take the added competition into account.
Additionally, new technology continues to change the market and the products necessary to compete. Even companies that have traditionally avoided the market (like telecoms) are starting to show some interest. However, it has been that way for decades so this does not overly concern us as management has proven adept at growing the business in the face of numerous competitors.
The biggest risk to the high side of our Intrinsic Value is the law being postponed for a substantial period of time. It has already been modified and delayed several times, so passage in August and subsequent implementation cannot be guaranteed. However, with the addition of GP Investments into the mix – who has superior knowledge of the Brazilian market and political system – we are confident that passage isn’t far off.
Needless to say, there is considerable upside and minimal downside with investing in Ituran at current prices. Management has proven they are up to the task of delivering solid growth and the company is not overly sensitive to economic volatility (see historic returns above), providing further comfort to investors.
There is considerable downside protection in the stock as the Brazil business of Ituran alone is equal in value to the current market cap of the entire company according to comparables provided above. Furthermore, current earnings power and a substantial dividend, help support the current price. Important to note, however, is that the company is growing, has $17M in net cash, and trades below 10x FCF with no additional units necessary to maintain the current level of profitability and payout (at least 50% of profits).
Should law No. 245 pass, the upside is immense as Ituran has already positioned itself wisely with an agreement with Chevy, whose yearly output of 632,201 vehicles (18% of Brazilian market) equals 100% of Ituran’s current global units serviced. Furthermore, should the law get passed, margins and profitability will increase dramatically as the agreement with Chevy requires no purchasing of physical units, thus decreasing Cap Ex requirements while driving up revenues.
While the market clearly doesn’t appreciate the current value and potential at Ituran, we believe the above rationale would lead one to conclude – as we did – that this is a potential home-run stock at current prices.
Disclosure: We are long Ituran (ticker: “ITRN’), but emphasize that everyone should conduct their own due diligence and make your own investment decisions. This is not, in any way shape or form, a recommendation to buy or sell any securities.