Is Quarterhill (TSX:QTRH) an undervalued stock?

Quarterhill (Quarterhill  Stock Quote, Chart, News, Analysts, Financials TSX:QTRH) remains on track to complete its acquisition of Conduent’s tolling business in the fourth quarter, a transaction that could more than double the Toronto-based transportation technology company’s annual revenue.

Beacon Securities analyst Gabriel Leung maintained his “Buy” rating and C$5.50 target following Quarterhill’s third-quarter results, writing that the acquisition remains central to his expectations for stronger revenue and earnings.

“As it relates to the pending acquisition of Conduent’s Tolling business, the company continues towards a Q4 close,” Leung said in his Nov. 10 report.. “It did not offer an update to its previous guidance, which called for pro-forma revenues of over $400M and EIBTDA margins between 10 – 15% once synergies are realized.”

Quarterhill reported third-quarter revenue of US$43.2-million, up 8.6% year-over-year and ahead of Leung’s US$41.7-million estimate and consensus of US$42.9-million. EBITDA reached US$3.9-million, slightly below his US$4.1-million forecast and consensus of US$4.4-million, but increased 181% from a year earlier. Gross profit increased 18%, while gross margin improved to 28.6% from 26.3%, reflecting restructuring efforts and better operating efficiency.

However, free cash flow was negative US$10.3-million, partly because of US$6.2-million in consulting expenses and restructuring costs associated with the Conduent acquisition. Leung said the spending has not changed his outlook for the combined business.

“While FCF was challenged by M&A consulting fees associated Conduent, we believe our underlying investment thesis around the revenue and earnings growth potential from the pending transaction remains intact,” he said.

Quarterhill ended September with US$51.6-million in cash and US$67-million in debt. It subsequently repaid its outstanding C$59.2-million convertible debenture and agreed to sell its remaining 10% interest in WiLAN for US$2.25-million. The company also received a US$6.25-million earnout payment related to its earlier sale of WiLAN.

Leung estimates Quarterhill will have approximately US$24.7-million in cash and US$102-million in debt after the Conduent acquisition, assuming the transaction’s US$70-million cash payment is debt-financed.

Quarterhill’s order backlog increased slightly to US$418.9-million from US$415-million in the previous quarter, providing visibility into future transportation infrastructure revenue.

Leung thinks the company’s existing business also has opportunities to expand in Canada and internationally, particularly in the United Kingdom, as it incorporates artificial intelligence into its traffic management and tolling systems.

“The company remains optimistic on its organic growth prospect both domestically and abroad (notably in the UK) given its strong product offering, which is being augmented by AI capabilities,” he said.

Leung forecasts fiscal 2026 revenue of US$164.7-million and EBITDA of US$14.3-million. Assuming the Conduent transaction closes near year-end, he expects revenue to increase to US$402.5-million and EBITDA to US$41-million in fiscal 2027. For fiscal 2028, he forecasts revenue of US$434.8-million and EBITDA of US$62.8-million.

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