VTSI - VirTra: Still Offers Value Despite Recent Rally

2023-12-28 19:13:41 ET

Summary

• VirTra is a small cap company that provides training solutions and simulations for law enforcement agencies worldwide.
• The company's training programs offer cost-effective and efficient ways for officers to handle difficult situations, reducing training time and expenses.
• VirTra has a strong financial performance, with high client retention rates, healthy margins, and low levels of debt, making it an attractive investment option.
• Despite being up 600% in the last 10 years, the stock still offers a very reasonable valuation versus its peers and its growth rate.

VirTra ( VTSI ) is a small cap company that produces training solutions and simulations for law enforcement agencies around the world. Despite being up significantly in recent years and easily beating market returns, the stock could still offer a lot of value for long term investors.

First, let's talk about what the company does. It offers technology driven solutions including simulations and virtual reality solutions to law enforcement agencies in order to train officers in how to use judgment in difficult and high tension situations. It also has training solutions for security providers and militaries operating in different countries. Some of the training solutions offered by the company include development of skills like de-escalation, judgmental use-of-force, marksmanship and a variety of real life situations.

These training programs should allow law enforcement agencies to handle situations more effectively, professionally and cause less headache for them since they are less likely to pull criticism for handling a situation wrongly. This is especially important in recent years where there is a rising awareness and scrutiny for law enforcement agencies and one mistake can ruin a police department's reputation for a long time. Training officers to handle difficult situations can be very difficult and costly in the real world due to additional costs like protective equipment, safety officers, specialized instructors or a large training site and VirTra's solution seems to work at a lower cost since it uses simulations and VR. It also offers immediate constructive feedback powered by AI which allows people to develop their skills quicker.

Since simulations are much cheaper, they can be used repeatedly until officers are sufficiently trained. They can be used as often as daily whereas live training can only be done occasionally when there are availabilities in terms of training staff, location and equipment. Not only is this method cheaper but also it would allow someone to get up to speed much quicker and reduce the amount of time needed for training.

The company offers different products depending on the budget of the law enforcement agency. For example the V-300 Simulator is one of the most expensive products and it includes 5 screens giving a view of nearly 300 degrees. There are also cheaper products that cover less visual area such as V-180 Simulator which covers 180 degrees and V-100 Simulator which covers 100 degrees (basically one screen) for agencies with lower budget. Many times an agency will get one of the cheaper solutions, try it out for a while and if they are impressed with the results they will move on to a more expensive solution. This provides the company with a lot of opportunities to upsell its services and more products.

Over the years, the company has done very well. It's 95% client retention rate allowed it to keep its revenues predictable and its upselling allowed it to grow its revenues over time. Currently the company enjoys annual revenues of $37 million in addition to an existing backlog of almost $20 million. This is up from $10 million just a few years ago. Another opportunity for the company to grow is to expand to more countries but this would probably require the company to come up with a cheaper product line since affordability will become an issue in many countries with limited budgets.

The company enjoys healthy margins that got better in recent years. The company's current gross margin of 64% is near the top of its 10-year range of 45% to 65% which indicates solid performance but also makes me wonder if there is any more room left for improvement. Meanwhile, the company also enjoys a 25% operating margin and nearly 20% net profit margin and both numbers are up significantly over the last few years. If the company can keep this up, it can be very successful but keep in mind that small cap companies tend to see their margins fluctuate more than large and established companies, so don't be surprised if these margins are all over the place next year. The good news is that the long term trend in the company's margins have been very healthy so far and we have little reason to expect it to change.

Since the company uses a subscription model, most of its revenues and repeatable and recurring. Also one thing I like about this company is that it has very low levels of debt. Currently the company holds about $17 million in cash and only $8 million in debt. This low debt level gives it a Debt to Equity rate of 0.13 which shows very low levels of leverage if any.

Even though the stock is up more than 100% in the last year and 600% in the last 10 years, it still enjoys a reasonable valuation. Its trailing P/E is 15 and forward P/E is 14 while the sector median is 23 for trailing P/E and 22 for forward P/E. This indicates that the company is trading at about 35-37% discount against its sector median in these metrics. When the company's strong growth is coupled with its low P/E, it gives it a very low PEG ratio well below 1. The company's EV/EBITDA metrics also look reasonable with trailing figure being 9.7 and forward figure being 8.0, both indicating a discount of about 30% versus sector median.

Of course no investment is risk-free. Since this company offers one type of products and relies on one type of customer, you are at the mercy of a niche business. Currently there is a lot of appetite for police training and very few competitors but in the future this could quickly change. We could see local governments cutting training budgets if they run short on money and we could also see competition emerging. The company's products are patented but someone could always come up with something different and perhaps better. We could also see a shift in regulations and policies where in-person training might be required by agencies which would make this company's product not as desirable but this is a highly unlikely scenario in today's highly technological environment.

I believe this stock offers good value as it offers growth at a reasonable price and in a niche market even though the stock has been up so much in recent years. Keep in mind that this is a small cap company with a market cap of $100 million so you must be comfortable with investing into small cap stocks in order to buy and hold this stock and many people are not totally comfortable with that which is understandable. As I always say, the best hedging is diversification so make sure that no stock claims too much of your total portfolio value and keep your individual positions small just in case.

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