11:49AM Mike Tarsala's TechWatch -- Iteris (ITI $3.13 +0.18)
One of our best consumer tech stock ideas since we looked at Interactive Systems Worldwide (Platinum customers see archives) three months ago is Iteris, a tiny company that seems to have a huge and potentially profitable opportunity to make the roads safer with its lane-departure warning system for cars and heavy trucks.
As far as we know, there’s nothing on the market like the Iteris AutoVue product, a virtual “rumble strip” that uses object-recognition software to sense when a vehicle is unintentionally straying from its traffic lane. It’s essentially a small imaging sensor that’s installed between the rearview mirror and windshield of new vehicles. It can “see” the lane marking painted on the asphalt, without the use of any installed equipment in or on the road. Stray from your lane without using a turn signal traveling at more than 40 mph, and AutoVue will alert you through the vehicle’s audio speakers with a rumble-strip sound. Iteris (ITI, $3.13) won’t impress fundamental analysts who are looking for deep value. Although revenue growth has been strong (up about 25% a year over the past 5 yrs), the company’s latest earnings report left a lot to be desired, as the company lost money on a GAAP basis. Iteris has nearly no cash, since it regularly sweeps it to pay off debt of about $15 mln (vs. cap of about $70 mln). While the company will point out that it’s profitable excluding merger-related and other non-cash charges, those charges are significant (there was an $11.5 mln charge just for stock-based comp in the most recently reported quarter).
Despite financial numbers that don’t seem to add up to much right now, we still think Iteris is a stock that’s worth a serious look. After talking to management, we think the company has hit an operational trough, and should show bottom-line improvement in its fourth quarter, ended March. We think the company should be profitable for calendar year ’05. And if things go well, Iteris has the potential to more than double that earnings growth in calendar year ’06.
We also think Iteris is ahead of a potentially strong news cycle in coming months, and could see stock appreciation as management starts to make a much stronger effort to visit with potential investors and to sell its story at conferences. We note that Iteris will be presenting later this afternoon (Feb. 23) at the Roth Capital Partners conference.
In the long-term, the AutoVue system, which carries an average selling price of about $500 on commercial trucks, has the potential to eventually become standard equipment on many new 18-wheelers, with some anticipated help from legislation. A bill the company expects will be introduced in Congress this year would propose tax credits for trucking companies that install AutoVue. We note that there are roughly 8 mln heavy trucks on U.S. roads alone, with more than 400,000 new ones sold each year.
Passenger cars are a much larger potential market than even trucks, since there are about 40 mln new cars sold worldwide each year. Right now, the AutoVue system comes installed in one of the option packages on the Infiniti FX-45 luxury SUV (the feature has been touted in Infiniti’s advertising). It’ll come as optional equipment in the spring on some Infinity M-35 and M-45 models.
In speaking to multiple contacts, we think Iteris has a chance to become part more popular Infiniti vehicle options packages in the fall – ones with up to 60% customer uptake.
Additional contracts with major automakers could come when the ’06 models hit the showrooms. We hear that Ford (0) could be the next customer. U.S. automaker has used AutoVue in its Meadow One concept car, seen at auto shows. We also believe the company may be in talks with Honda, which has introduced a lane-departure warning system in cars sold in Japan that we understand can’t be adjusted to work in the U.S. It’s also of interest that about 2% Iteris is owned by Daimler Chrysler (DCX).
“Infiniti was our first deal, and we think we can get two or three more this year,” says John Johnson, the Iteris chief executive. “We think we have the most important new safety device since the seat belt.”
Johnson doesn’t seem to be overstating AutoVue’s safety potential. According to the National Highway Transportation and Safety Administration, there are about 3,200 lives saved by air bags a year, and 9,500 lives saved by seat belts. Yet there were 16,000 lives lost by lane or road departures – a high percentage of which may have been prevented had vehicles had a warning system installed like AutoVue.
Iteris hopes to dominate the trucking market with AutoVue. The company currently has about 22 fleets with 47,000 commercial vehicles evaluating its systems right now. It’s already sold Maverick Transportation on AutoVue for its entire national suite fleet of 1,000 trucks. And three major European bus fleets, which collectively manufacture about 7,000 vehicles a year, are making AutoVue an option.
While the company is likely to eventually face serious competition in the commercial market for its lane-departure system (we understand that Delphi (DPH), Bosch, and Siemens (SI) are all working on similar technologies), there’s also market share for all the major players. We think AutoVue has a first-mover advantage of roughly a year, as well as relationships with key automakers. (In theory, a deal with Infiniti could eventually give Iteris the leg up on getting a deal with all of Nissan, for example).
Down the road, Iteris CEO Johnson tells us that the company is working on additional technologies that will work with AutoVue, such as a smarter cruise-control system that can adjust the speed of your car to that of the car in front of you – even around a bend.
The potential letdown for investors who would like to invest in a pure-play on the virtual rumble strip technology is that while much of the excitement about the Iteris story involves AutoVue, its mainline business revolves around a product called Vantage, a vehicle detection system sold to municipalities that uses video-imaging at intersections to trigger traffic lights. Traffic management control products and services represent about 90% of the company’s current sales, and all of its profit, ex items.
Iteris believes there is a strong market over the next five years for Vantage. The company says the video-based Vantage traffic control system can save cities money compared with the alternative of installing inductive loops in the road (the wires buried in the road your car must pass over to trip traffic lights). Iteris estimates that up to 40% of the loops in the ground don’t work at any given time, and that its product represents a cost savings, since the loops must be replaced (meaning the road must be ripped up) as often as every 2 to 4 years in busy locations.
Johnson says the Vantage business should be able to grow 20% over the next few years and generate operating margins of about 15%. He adds that consulting related to Iteris’ traffic infrastructure business should grow 5 to 10% a year, and generate operating margins in the range of 8-10%.
We think there are some potential risks to those growth rates. In the December quarter, the consulting part of the infrastructure business declined 20% from the previous year, largely due to congressional delays in passing the federal highway bill. We also note that many local and state governments throughout the U.S. are suffering budgetary woes and high deficits. The company could run the risk of similar spending delays in the future.
Yet we are encouraged that management says some agencies are figuring out creative ways to get their infrastructure projects going, and the company says it is seeing increasing business activity. Johnson said on the last earnings call that, “I personally believe the worst is over,” adding that the company is looking to expand staff again, as Iteris plans for new contact awards.
There are a lot of pieces that must come together for Iteris in the coming years if it wants to dominate its market. But we set out to put together what we think is a reasonable estimate of what the company could earn in calendar year ’06, provided the company continues to lead the market with AutoVue, and that the company makes progress in signing new customers.
As far as we can tell, the main Vantage infrastructure business (about 90% of total sales) should boost revs on the order of 20% from now until ’06, from calendar year infrastructure revs of about $46.3 mln, resulting in CY’06 revs of $66.67 mln. At 40% gross margin, that part of the business would generate gross profit of about $26.66 mln.
It’s hard to judge the uptake of the AutoVue product, but we assume the company can grow that business at about 75% a year (that means we figure total AutoVue sales could reach $12.25 mln in CY ’06). Trucks will probably make up most of AutoVue revs in coming years (we figured three-fourths). Under those assumptions, we estimate truck revenue could be nearly $9.19 mln in CY ’06. At 40% gross margin, that would generate $3.675 mln in gross profit.
Infrastructure and truck gross margin together, therefore, would be $30.355 mln. On a calendar year basis, operating expenses are running about $18 mln, excluding one-time items. If those were to increase 20% a year, expenses would reach $25.92 mln in CY ’06, leaving $4.415 mln in profit before taxes.
The company anticipates generating revenue from all AutoVue units sold in automobiles. So if 25% of total AutoVue sales anticipated in ’06 came from cars, the company would have about $3.0625 mln in royalties (which is pure profit). Adding the royalties to total infrastructure and truck revs before taxes would amount to $7.4775 mln.
Assuming a 35% tax rate, Iteris would have to pay some $2.617 mln to the government. But the company can recognize about $2 mln a year in net operating loss carry-forwards, meaning it would only have to pay about $617,000 in taxes, under our assumptions. That would leave net income of $6.86 mln, or about $0.25 a share given the current share count.
We note that the stock currently trades at about 12Xs that forward estimate. We think it’s possible that the stock could garner a forward EPS multiple in the high teens or even the 20s, once more shareholders become more comfortable with the story and if the company announces additional AutoVue contracts in the coming months.
It’s also noteworthy to look at potential AutoVue earnings based on potential market penetration. We noted earlier that there are about 8 mln commercial trucks on U.S. roads, as per NHTSA data. If the company could eventually sell into just 0.75 percent of that market, there would be about 60,000 AutoVue systems sold. With ASPs in trucks averaging $500 and gross margins expected to be about 40%, the AutoVue sales in trucks would generate $12 mln in gross profit.
Revenue from sales of AutoVue in passenger vehicles is coming via a royalty relationship with auto parts supplier Valeo. If Iteris could penetrate just 2% of worldwide new car sales (40 mln a year) with AutoVue over time, we think the company would generate somewhere in the neighborhood of $6.2 mln in royalties, or about $8 per unit.
We want to see confirmation in coming months that the business is on track, and that the company is maximizing its first-to-market advantage. But going further into the future, it’s possible to see much large earnings and sales numbers for Iteris than our assumptions indicate, based on the potential for the product to eventually be installed in a large number of large trucks, passenger vehicles, and even on motor coaches and buses. -- Mike Tarsala, mtarsala@briefing.com. |
