Buy Sierra Wireless on pullback: National Bank Financial

A downtick in shares of Sierra Wireless (TSX:SW, Nasdaq:SWIR) after an acquisition is a great opportunity for investors to buy a great tech name, says National Bank Financial analyst Richard Tse.

On Wednesday, Sierra Wireless announced it had acquired machine-to-machine device company Numerex for approximately (U.S.) $107-million. The company said the pickup would expand its position as an Internet of Things pure-play.

“The acquisition of Numerex accelerates our IoT device-to-cloud strategy by adding an established customer base, significant sales capacity, proven solutions and recurring revenue scale,” said Sierra Wirelss CEO Jason Cohenour. “The combination of Sierra Wireless and Numerex will represent a powerful business and technology platform that will enable the company to drive a global leadership position in IoT services and solutions.”

Tse says today’s action on Sierra Wirless’s stock is puzzling to him.

“At the time of writing Sierra Wireless stock is down ~8% post-market given an initially dilutive acquisition,” he explains. “We believe this presents a buying opportunity, given the Q2 results, outlook and acquisition of Numerex announced this evening. Specifically, Sierra Wireless announced the acquisition of Numerex Corp. (NASDAQ: NMRX) in an all-share transaction valued at $127 mln enterprise value. Valuation, based on F2017E is: EV/Sales of 1.8x and EV/EBITDA of 17.3x – very reasonable in our view. On a normalized basis, valuation is closer to 13x EV/EBITDA. We expect the transaction to be dilutive by 10%; however, we expect the transaction to be ~15% accretive to EPS on a run-rate basis. More importantly, it adds base of recurring revenue to the name – something we’ve long lauded for giving Sierra Wireless an end-to-end offering. In our view, the transaction is positive from a strategic and (longer-term) financial perspective.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $32.00 on Sierra Wireless, implying a return of nine per cent at the time of publication.

Tse thinks Sierra Wireless will post EBITDA of $49.0-million on revenue of $683.1-million in fiscal 2017. He expects those numbers will improve to EBITDA of $61.6-million on a topline of $755.8-million the following year.