2023-06-14 06:27:48 ET
Summary
- PCTEL shares remain oversold and are expected to see a robust increase in price over the next 12-18 months.
- The company's growth strategies include product innovation and distribution, as well as increasing overall revenue per customer.
- PCTEL's strong cash flow generation allows for rewarding shareholders with a 4.35% yield and investing in future growth initiatives.
Intro
We initially stamped a 'Buy' rating on PCTEL , Inc. ( PCTI ) in June of last year (Approximately 12 months ago) and reiterated our bullish stance in the August -2022 commentary post the company's second-quarter numbers last year. Since the initial 'Buy' rating in June, shares have returned close to 30% if we include the dividend distributions in this timeframe. Furthermore, we would argue that PCTEL remains in a fundamentally stronger position now compared to 12 months ago which means there remains plenty of scope for sustained long-term gains here going forward.
As we see below on the long-term chart, PCTI stock remains oversold and continues to trade at a steep discount to its 2013 highs (which were close to $10 a share). Although the present bottoming formation is taking longer than we expected, we still expect a robust move-up in the share price over the next 12 to 18 months.
Our bullishness stems from the premise that if PCTEL can continue to report sufficient sales to drive earnings and cash flow, then this cash can be used to not only reward shareholders through dividend payments but also can be used to drive forward the company's growth strategies which we will get into later in the article.
PCTI Long-Term Technicals (Finviz.com)
Q1 Earnings
Although sales in the first quarter only increased by a mere $500k over the same period of 12 months prior, an elevated gross margin of 50.2% in Q1 drove net profit to $1.3 million. Maintaining & growing profitability is crucial for investing in value plays so an increasing gross margin trend (Trailing 12-month gross margin comes in at a lower 48% approx.) will not have gone unnoticed by long-term investors here.
Sales of 'Test & Measurement' products grew by over 30% in the quarter whereas sales from the bigger 'antennas and industrial IoT' segment dropped by approximately 9%. Although earnings are expected to be 'lumpy' over the next few quarters (which the CFO also guided for Q2 due primarily to supply-chain headwinds in the antenna space), investors need to remain focused on what is coming down the track here in relation to the company's growth strategies.
Growth Strategies
In Q1 for example, PCTEL launched its new VerStack antenna as well as its ' Walk Testing System ' for radio networks which is encouraging as more value being added over time should continue to keep demand elevated and the backlog ticking over.
With respect to antennas & their distribution, the runway for growth remains robust with PCTEL now manufacturing its Smarteq antennas for a European electric vehicle customer as well as an international forklift provider. Furthermore, one of management's core strategies is to increase the overall revenue per customer by offering more tailored turnkey solutions which can add value over time. By understanding customers' businesses, management believes PCTEL will have the means to provide more components (resulting in more revenues) for the solutions on-hand.
Cash-Flow & Value
PCTEL generated $2.4 million in operating cash flow in Q1 and spent roughly $400k on capital expenditure. This means free cash flow came to approximately $2 million which easily covered the quarterly dividend payment of $1 million. If one wants to look at trailing 12-month numbers, PCTEL generated roughly $7 million of free-cash-flow of which $4.1 million was paid out in dividend payments. Suffice it to say, PCTEL continues to generate ample cash to both reward shareholders through that 4.35% yield as well as invest in its future through product innovation and product distribution as alluded to earlier.
Therefore if we divide PCTEL's current market cap of $96.94 million by the company's trailing 12-month free cash flow of $7 million, we get a trailing free-cash-flow multiple of 13.85. This key valuation multiple informs us of the cost of PCTEL's free cash flow for the investor and 13.85 is by no means expensive. Furthermore, with the absence of interest-bearing debt on the balance sheet, management can take that cash flow and keep on investing aggressively behind its growth initiatives (even in no-growth environments which PCTEL will most likely experience this year). The end result over time will be growth for PCTEL which is why investors should remain long this play.
Risks
The principal risk from an investor's standpoint is with respect to maintaining profitability. As mentioned above, positive earnings coupled with sound management of working capital will continue to enable management to invest in the growth of the company. However, an increasing level of supply-chain bottlenecks (which is essentially something out of the company's hands) could result in raw materials not arriving quickly enough at PCTEL. Therefore, this trend should be watched from a profitability standpoint as keeping customers served is crucial going forward to keep the income statement ticking over.
Suffice it to say, if we saw some deterioration in the supply chain which consequently affected profitability, elevated selling would adversely affect PCTEL most likely more than bigger companies. The reason is that PCTEL is a micro-cap play (Market cap comes is approximately $95 million) with a pretty low trading volume. Therefore, substantial selling would move shares pretty significantly, most likely back to the stock's 2022 lows at around $4 a share.
Conclusion
Therefore, to sum up, we are reiterating our bullish stance on PCTEL due to oversold technicals, growing margins, and numerous growth channels including the company's recent foray into the EV space. Let's see what Q2 numbers bring. We look forward to continued coverage.
For further details see:
PCTEL: Long-Term Investors Will Continue To Be Rewarded