Sierra Wireless has 75% upside, National Bank Financial says

Sierra Wireless’s (TSX:SW, Nasdaq:SWIR) most recent quarterly results revealed underlying momentum in its business, National Bank Financial analyst Richard Tse said.

On Thursday, Sierra Wireless reported its fourth quarter and fiscal 2017 results. In the fourth quarter, the company lost (All figures USD) $3.5-million on revenue of $183.5-million, an increase of 12.6 per cent compared over the $163-million topline the company posted in the fourth quarter of 2016.

“In the fourth quarter of 2017, we delivered year-over-year revenue increases in each of our three segments, with particularly strong growth in our high-margin enterprise and IoT [Internet of things] services lines of business,” said CEO Jason Cohenour. “We also significantly strengthened our IoT services business with the addition of Numerex and are now better positioned than ever before to expand our IoT services and scale our subscription-based recurring revenue.”

Tse says if you look closely, things are shaping up well for Sierra Wireless.

“Sierra Wireless reported in-line Q4 results ahead of our (and consensus) estimates with a mixed Q1 outlook given a combination of component shortages and an integration of a recent acquisition,” the analyst says. “But while the Q1 outlook might be mixed, we believe the underlying thesis is unchanged. Why? For one, we see the component shortage as a sign of robust demand even if the negative takeaway could be a deficiency in its supply chain planning processes. Second, Sierra’s “core” business saw strength (with strong momentum in Enterprise and Cloud – now known as IoT Services). Third, we believe the Company’s most recent acquisition is driving the Company’s IoT Services growth. While it was already strong with 28% organic growth, Numerex should add to that momentum. Finally, we believe the Company is on course to drive its recurring revenue base higher. With Numerex, Sierra’s also seen its recurring revenue move up to 15%, from its former target of 10%. And it’s our expectation that the Company will look to drive that target potentially toward 20% over the next 12 months – driving a commensurate valuation re-rating. If that weren’t enough, we also see growing operating leverage in the second half of this fiscal year when Numerex is fully integrated.”

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 75 per cent at the time of publication.

Tse thinks Sierra Wireless will generate EBITDA of (US) $67.5-million on revenue of $793.5-million in fiscal 2018. He expects those numbers will improve to EBITDA of $73.4-million on a topline of $858.8-million the following year.