Sierra Wireless is not a stock to buy now, National Bank says

National Bank Financial analyst Richard Tse is saying stick to the sidelines when it comes to mobile computing and IoT communications company Sierra Wireless (Sierra Wireless Stock Quote, Chart, News TSX:SW).

The analyst reviewed the company’s latest quarterly results in an update to clients on Thursday, saying while the remainder of 2020 could be challenging, the longer-term outlook is also less than clear.

Vancouver-headquartered Sierra Wireless reported its first quarter 2020 results on Thursday, posting revenue that was down 9.3 per cent year-over-year to $157.6 million. That number divided up into $78.8 million from the company’s IoT Solutions segment, a 16.4 per cent drop year-over-year, which management attributed to lower hardware sales in Enterprise gateway products and IoT Solutions modules.

Its other segment, Embedded Broadband came in with revenue of $78.8 million,which was relatively flat year-over-year, a reflection of lower mobile computing module sales offset by stronger demand from automotive customers. The company saw $26.8 million in recurring and other services revenue for the quarter. (All figures in US dollars.)

On the impact of COVID-19 on its business, management related that its China operations were shuttered for much of the quarter while overall customer demand was not significantly affected. At the same time, Sierra said it’s facing weaker-than-expected revenue projections for the second quarter, with a reduction in its Automotive business being a key factor. Management has suspended guidance citing uncertainties related to the pandemic.

“I’m very pleased with how well our global team at Sierra Wireless has responded to the COVID-19 situation and worked quickly to adjust to this challenging environment while focusing on delivering leading IoT solutions to our customers,” said Kent Thexton, President and CEO, in a press release. “Despite some pandemic-related supply chain disruptions, our Q1 revenue met our expectations and our recurring revenue win activity was robust in the First Quarter.”

On the quarter, Sierra came ahead of Tse’s estimate with $158 million compared to the analyst’s $144 million, while its adjusted EPS loss of $0.41 per share was worse than Tse’s forecasted loss of $0.30 per share.

Tse said while he likes the potential pivot Sierra is conducting towards IoT services, the fact that the company is still three to four years out in terms of value creation makes the road ahead uncertain.

Tse wrote, “The bottom line – while Sierra Wireless’s pivot to IoT could drive a leg of growth if it’s successfully executed, the current backdrop likely pushes out what were already aggressive targets, even if long term. What’s not clear though are the recent changes to the Board prompted by Lion Point Capital which owns 9.4 per cent of the shares. No doubt, that could play some role to value creation down the road but for now, we’d tread lightly.”

With the update, Tse maintained his “Sector Perform” rating but raised his target from USS8.00 to US$9.00, which as of publication date represented a projected 12-month return of negative two per cent.

The analyst is calling for fiscal 2020 revenue of $602.6 million and an EBITDA loss of $36 million.