Be cautious with Sierra Wireless, National Bank Financial says

Despite better than expected quarterly results, National Bank Financial analyst Richard Tse still sees some risk in Sierra Wireless (TSX:SW).

On Thursday, Sierra Wireless reported its Q2, 2018 results. The company lost (US) $11.38-million on revenue of $201.9-million, a topline that was up 16.4 per cent over the same period last year.

“In the second quarter of 2018, we delivered solid revenue and adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] growth on a year-over-year and sequential basis,” interim CEO Kent Thexton said. “Our two fastest-growing and highest-margin businesses — namely enterprise solutions and IoT [Internet of things] services — represented 25 per cent of total revenue in Q2 and we continued to strengthen our position as a leader in device-to-cloud IoT solutions.”

Tse says this was a stronger quarter than he had modeled, and says it directly challenges the notion that the company might struggle through the loss of departing boss Jason Cohenour.

“Sierra Wireless reported better than expected Q2 results and Q3 guidance,” Tse notes. “In our view, it appears the recent and sudden “retirement” of former CEO Jason Cohenour was not operationally related – lifting the overhang of that departure. Further, the fact that the Company is close to hiring a new CEO before Q4 also bodes well.”

But the analyst cautions against jumping into the stock just yet.

“That said, while we expect the stock to react positively to the results and outlook, we wouldn’t chase the name as we believe there continues to be some risk for pause with a new CEO,” Tse adds. “Bottom line, we like the potential that a pivot to services offers upside when it comes to adding value, but we’d rather move cautiously given this name.”

In a research update to clients today, Tse maintained his “Sector Perfom” rating and one-year price target of (US) $21.00 on Sierra Wireless, implying a return of 23 per cent at the time of publication.

Tse thinks Sierra Wirless will generate EBITDA of (US) $54.9-milion on revenue of $805.5-million in fiscal 2018. He expects those numbers will improve to EBITDA of $71.1-million on a topline of $862.8-million the following year.