The selloff in shares of Sierra Wireless (TSX:SW) has been so aggressive that it has reached a point where investors should take a serious look at the stock again, says Paradigm Capital analyst Daniel Kim.
In a research update to clients this morning, Kim upgraded Sierra Wireless from “Hold” to “Buy”, while simultaneously lowering his one-year target price on the stock from $26.000 to $25.00, implying a return of 30 per cent at the time of publication.
Kim explains that the more than halving of Sierra Wireless’s stock from its highs means the company is trading at an historically low EV/EBITDA multiples. But he warns that the company is, in his opinion, set up for steady growth, not hyper-growth. He notes that Sierra Wireless management claims the automotive market is just 10 per cent penetrated, and adds that consumer demand and regulatory changes are expected to drive growth in the space, but cautions that, in the near term, a large auto OEM overstocked inventory from SW in the third quarter, meaning regular order patterns probably won’t return until Q1.
In broader terms, Kim thinks the company’s move to become an M2M pure-play has set the company up for top and bottom line growth for the foreseeable future. He thinks the company’s biggest opportunities lie in connected cars and smart meters.
“With the disposition of its AirCard business, Sierra Wireless has established itself as a pure-play and dominant player in the rapidly evolving machine-to-machine (M2M) communications market,” says Kim. “Together with its mobile computing business currently in the early stages of a cyclical upturn with the roll-out of new 4G LTE networks, we look for SW to solidly grow revenue, gross margin and earnings over the next several years.”
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