ITRN - Ituran Location And Control: Low Valuation And Strong Expected Growth

2023-09-25 13:58:58 ET

Summary

• Ituran Location and Control is an Israeli company offering stolen vehicle tracking and fleet management services.
• The stock is reasonably valued, has high profitability metrics, and is expected to experience strong growth.
• Ituran has the potential to outperform the market in the coming year.

Ituran Location and Control ( ITRN ) is a small, but growing company based in Israel. Ituran looks intriguing as a potential investment due to the stock's reasonable valuation, high profitability metrics, and strong expected growth. Overall, ITRN looks like a stock with the potential to outperform the broader market over the next year.

The company offers real-time stolen vehicle/tracking services and fleet management services. Ituran also offers on-demand navigation guidance and information. The company also provides Base Site, which is a radio receiver that can send data to and from transponders and to control centers. Ituran's Control Center consists of software that collects data from various base sites for transmitting location data to law enforcement agencies and other customers.

Ituran has a growing base of over 2 million subscribers who pay on a monthly basis for the company's services.

Ituran derives about 51% of total revenue from Israel. Brazil comprises 24% of total company revenue, with the remaining 25% coming from other countries. There is opportunity for Ituran to further expand inside and outside of Israel.

Building on Positive Q2 2023 Results

Ituran achieved solid subscription revenue and subscriber growth in Q2 . The company added 47,000 subscribers in Q2 (45,000 were from the aftermarket with 2,000 from OEM). Subscription revenue increased at a strong 13% in Q2 2023 over Q2 2022. The subscription revenue gain was 17% when calculated in local currencies.

Some of ITRN's wins in Q2 can be attributed to the company entering the financing business. Ituran's Brazilian subsidiary began a partnership with Santander Bank ( SAN ) during Q2, which allowed the company to enter the automotive financing market. The company also launched a stolen vehicle recovery service for motorcycles in Latin America, which helped drive growth. Of course, Ituran's existing stolen vehicle recovery business also drove growth during the quarter.

Ituran has positive expectations for the future. The company expects the recent accelerated subscriber gains to drive revenue growth with faster profitability growth due to the operating leverage associated with its business. ITRN expects that these positive trends will continue in 2023 and beyond.

I like how the company added new sources of revenue during the quarter with the new financing business and the new stolen motorcycle recovery business. These new businesses diversify the company's offerings, which can help drive long-term growth for Ituran.

Other Positive Developments

The market that Ituran operates in has steady expected growth for the long-term. The global Stolen Vehicle Recovery market is expected to grow by about 7.6% per year to reach about $13.4 billion by 2027. This is likely to provide a nice tailwind for ITRN to continue its expansion/growth efforts.

In August 2023, Barclays increased its price target for ITRN to $35 from a previous target of $30 with an overweight recommendation. This is 18.5% higher than the current stock price.

Ituran achieves strong profitability metrics which helps drive earnings growth. Over the past 12 months, ITRN achieved an EBITDA margin of 27% over the sector median of 9% and a net income margin of 14% over the sector median of 2%. The company's returns are also strong. Ituran achieved a strong ROE of 29%, ROIC of 22.6%, and an ROA of 14%. These double-digit margins and returns help drive strong bottom line gains for Ituran.

Ituran has a strong balance sheet with $34.5 million in total cash and short term investments with only $9.4 million in total debt, leaving the company with zero net debt. This marks the fourth year in a row where Ituran carried zero net debt.

ITRN produced strong operating cash flow of $62.2 million over the trailing 12 months, which was significantly higher than the $45.1 million from 2022. The company effectively handles its cash flow, allowing the business to expand while rewarding shareholders. Over the trailing 12 months, Ituran paid $18.1 million in CapEx, repaid $16 million of debt, paid dividends of $11.3 million, and repurchased $9.7 million of stock. The company was left with $36.9 million in free cash flow.

Attractive Valuation

Ituran is attractively valued as the stock trades at just 11.5x expected EPS of $2.58 for 2024. This is lower than the Communications Equipment industry's forward PE of 12.5x and the sector median of 22x. ITRN is also trading with an attractive trailing price/cashflow of 9.5x, which is significantly below the sector median of 18x. This leaves plenty of room to the upside for the stock as the company continues its growth.

Ituran is expected to grow revenue at 6% in 2023 and 7% in 2024. Earnings are expected to grow at a strong 30% in 2023 with expectations of a 9% gain in 2024. If these gains are met or exceeded, the stock has a good chance of outperforming the broader market from this attractive valuation level in my opinion.

Technical Perspective

The stock made strong gains from May to September and has been consolidating in the $29 to $31 range. The stock could pull back further on market volatility and/or as a result of fears of a possible global economic slowdown. However, I expect the stock to perform well over the long-term.

The blue MACD line in the middle of the chart is below the red signal line, indicating that the stock is still in a slight bearish mode. However, the histogram bars show that the negative momentum is decreasing. The RSI indicator pulled back from an overbought condition, but remains bullish above the 50 level.

The stock will probably continue to trade mostly sideways until the next catalyst, which will probably be the next earnings report in November.

Ituran Location and Control's Long-Term Outlook

My overall thesis for Ituran is positive over the long-term. The company should benefit over the next several years as it effectively expands during a growth phase for the global Stolen Vehicle Recovery market. Ituran's low valuation should allow the stock to increase at an above-average pace, driven by revenue and earnings growth over at least the next year.

The biggest risk for the stock and the investment thesis in my opinion is the threat of a global recession over the next year which can be triggered by higher interest rates, slowing down growth and economic activity. Another risk is any unfavorable changes in Ituran's relationships with insurance companies and/or vehicle manufacturers. Of course, a reduction in vehicle theft rates due to improved technology or other factors could lead to lower growth for ITRN.

Analysts have a one-year price target of $35 for the stock, which is 18.5% higher than the current price. This looks reasonable as it would take the PE to 13.6x based on expected EPS of $2.58 for 2024. With that said, the stock has a chance to outperform the market if conditions remain in favor of the company, in my view.

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