Cormark downgrades Sierra Wireless to “Market Perform”

Cormark analyst Richard Tse says the business of recent Sierra Wireless acquisition In Motion Technologies is very similar its existing business segments, which he believes is already priced into the company’s stock.
Sierra Wireless (TSX:SW) has had a strong run but the stock is now fairly valued, says Cormark analyst Richard Tse.

Yesterday, Sierra Wireless reported its Q4 and full-year 2013 results. In the fourth quarter, the company earned $3.1-million, or 10 cents a share on revenue of $118.6-million. Both the top and bottom line beat Tse’s expectations of $115-million and nine cents a share, respectively.

Tse says the company’s Q4 was solid, but the outlook appears to be “mixed”. He points to the Sierra Wireless’s seemingly renewed focus on hardware as “capping” the company’s valuation because that model has little recurring revenue and lower margins than software. While there is a good business in the machine-to-machine space, he says, these businesses trade at lower multiples than software/services models.

In explaining his take on Sierra Wireless’s current valuation, Tse points to two recent acquisitions; the October pickup of M2M module company AnyDATA and the recently announced acquisition of In Motion Technology. He says both acquisitions are “are positive in fortifying the company’s hardware module base,” but are very similar to the company’s existing segments, which Tse believes are already priced into the stock.

Tse, noting that Sierra Wireless was one of his favourite names of 2013, says investors should continue to watch the company very closely because it is simply one of the better positioned M2M names, and its current model of supplying modules that facilitate mobile connections has the potential for expansion and a possible rerating. For now, Tse notes that a run that has taken the stock from under $8 in December of 2012 to more than $20 today has Sierra Wireless trading at a P/E of more than 35x and an EV/EBITDA of more than 15x.

In a research update to clients this morning, Tse noted that on January 27th, he downgraded the stock from “Buy” to “Market Perform”, while maintaining his $20 one-year target.

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