Sandvine is still undervalued, says Cormark

Shares of Sandvine (Sandvine Stock Quote, Chart, News: TSX:SVC) are off their lows, but Cormark analyst Richard Tse thinks the company is still undervalued.

On Thursday, Sandvine reported its Q2, 2016 results. The company earned (U.S) 3.98-million on revenue of $33.5-million, a 17 per cent topline bump over the same period last year.

“We are pleased with Sandvine’s growth in the quarter, the 11-per-cent increase in revenue we’ve experienced so far this year and the fact that we’ve added more customers to date this year than we did for all of 2015. I believe that these accomplishments reflect, in part, the investment we made last year to increase the size of our sales force,” said CEO Dave Caputo. “Revenue remained well diversified across sales regions, was strong in the wireless market and no customer represented more than 10 per cent of revenue.”

Tse says he regards Sandvine’s second quarter results as more evidence that the stock should be trading higher than it currently is.

“In our view, Sandvine’s solid quarterly results underscore our investment thesis on the name. In particular, we believe that investment thesis was further underscored by a growing base of new customers – 20 in the quarter and 42 YTD when the company added 36 in all of 2015,” says the analyst. “And while critics may be quick to suggest the 42 new customers YTD are small operators, we’d note there are a number of large customers in those new wins, including a North American satellite operator which awarded Sandvine a (large) $4 MM follow on expansion order in the quarter. The bottom line (and consistent with our investment thesis) is that Sandvine has added a number of new irons in the fire over the past year and the underlying metrics (particularly new customers) underscore the early execution on those initiatives. Perhaps even more important is that when it comes to investments into sales, the initiatives are still scaling as those sales resources were only added in the back half of F2015. Bottom line, we believe SVC continues to be undervalued given its market leading position that’s buoyed by a large cash balance. At 0.9x EV/S and 9.4x P/E (F2017E) and a 2.4% yield, we believe the risk-to-reward is too compelling.”

In a research update to clients today, Tse maintained his “Buy” rating and one-year price target of $5.00 on Sandvine. Shares of the company closed Friday at $3.07.