Description

Overview:

CalAmp (CAMP) represents an opportunity to own a low tech, tech company that is experiencing significant growth and margin expansion in most of its markets while trading at just 7.5x free cash flow. This is a very simple story – think significant ASP increases with an upgrade cycle driving unit growth. This investment thesis is similar to those of our last few VIC write-ups – ALDA, SLNT, and others – simple businesses that have the wind at their backs based on industry dynamics. CAMP will benefit from the significant near term DBS equipment upgrade cycle that will drive higher ASP’s and higher gross profits. CAMP has achieved positive operating cash flow for 8 consecutive years and positive operating income for 6 consecutive years.

About three quarters of CAMP’s business is making and manufacturing the outdoor satellite dishes for Direct Broadcast Satellite (DBS) for Echostar (DISH), DirecTV (DTV), and channels associated with these operators. The remaining business is in wireless products to customers who are experiencing growth such as EF Johnson (EFJI) and others. The company breaks its business into 2 segments – Products (90%) and Solutions (10%). CAMP has used its cash flow from the satellite business to diversify into other markets through acquisitions and product development. The “old” CAMP’s dependency on the 2 large DBS providers caused a lumpy but profitable revenue stream. However, due to the diversification and also our thesis that with the onset of HD broadcasting and more complex equipment required for HDTV and DVR’s, CAMP should be able to grow through seasonality and the digital upgrade cycle will benefit CAMP for the next few years. Rather than focusing on the business specifics we refer you to recent filings and we will focus on the exciting investment story.

We all know that the competitive landscape for broadcasting has heated up as cable, satellite and the RBOC’s are offering deals to the consumer. However, what’s bad for the DBS providers is good for CAMP. Churn is good as it requires the consumer to obtain new satellite equipment and the special offers from the DBS providers such as free DVR service are increasing gross additions in the number of subscribers to both DISH and DTV. Most importantly, as satellite service switches to High-Definition (HD) broadcasting, a new satellite dish is required which has twice the ASP as the current dish. This is because of the new satellites and spectrum the HD equipment must “see”. That means that the current installed base will be required to upgrade their equipment. Let’s assume that the current installed base does not upgrade their equipment… based on the ASP of the new equipment to support DVR’s CAMP should see 5 – 10% revenue growth if the units remain stagnant. Thus, our thesis is that although the satellite equipment market is competitive – (MTI, Sharp, Wistron, ProBrand compete with CAMP while the company maintains a leadership role with more than 50% of the U.S. market share) – CAMP continues to execute as it has unit growth and ASP increases and an upgrade cycle ahead. We believe the company deserves to trade at some multiple that is higher than 7.5x projected FCF.

Based on the Carmel Group, total DBS subscribers are estimated to approach 35 million by 2010. Given anticipated customer churn rates, this translates into approximately 6 to 8 million gross customer additions through the year 2010 that will require outdoor DBS equipment.
Recent Stock Activity:

Since the company reported a stellar 2nd quarter on October 6, 2005, we believe selling from venture capitalists left over from the April 2004 Vytek acquisition (they agreed to sell Vytek at the approximate price implied by recent trading levels) has held down the stock price. CAMP issued about 8 million shares for Vytek, much of which entered the float in 2004. We estimate the share amount that they sold could have been close to 1 million shares. Based on recent volume, we think this overhang has been lifted or is very close to ending. Our take is that the recent selling represents the Vytek remnants that were in more patient hands.

Management is extremely conservative and not promotional – we think their guidance is conservative.

Valuation:

Below we present some data for FY ’06 (Feb FY)….

Market Cap = $208 million
Enterprise Value = $184 million
Book Value = $ 7.22

For the first 6 months of FY ‘06 (as of Aug ’05)

Cash: $33 million
Debt: $ 9 million
EPS (6 mos - FYTD): $ 0.25
EBITDA (6 mos – FYTD):$ 11.7 million
Sales (6 mos – FYTD): $105 million

EV / EBITDA (6 mos – FYTD) = $184 / $11.7 = 15.7x FOR 6 MONTHS
P/E (6 mos – FYTD) = $9.19 / $0.25 = 36x FOR 6 MONTHS
P/E after backing out net cash on B.S. (6 mos – FYTD) = ($9.19 - $1.00) / $0.25 = 32x
P/Book = 1.2x
EV/Sales (6 mos – FYTD) = $184 / $105 = 1.75x FOR 6 MONTHS
Capex (6 mos – FYTD) = $ 1 million
FCF (6 mos – FYTD) = $10.7 million

Now we will make some assumptions to estimate full fiscal year 2006 valuations. CAMP’s business is seasonal and the historical pattern suggests that second and third quarters are the strongest. However, due to the launch of HD service coupled with the improvements it has made in its Vytek and Skybility businesses, the company should be able to grow through the seasonality that it had seen in the past. That being said, if we assume that the first half of the year is slightly lower than the second half of the year on all metrics then we can come to the following conclusions… Assuming a 10% net margin, which is in between 6% for the low quarter and 15%+ for the high quarter yields $1.26 million in earnings or $0.24 EPS for the fourth quarter.

Based on the above assumptions we will put together some valuations below for the full 2006 fiscal year.

Market Cap = $208 million
Enterprise Value (FY 2006E) = $172 million

For the full 12 months of FY 2006E (FEB)

Cash: $ 45million
Debt: $ 9 million
EPS (FY 2006E): $ 0.72
EBITDA (FY 2006E): $25.0 million
Sales (FY 2006E): $250 million

EV / EBITDA (FY 2006E) = $172 / $25 = 6.8x
P/E (FY 2006E) = $9.19 / $0.72 = 12.7x
P/E after backing out net cash on B.S. (FY 2006E) = ($9.19 - $1.60) / $0.72 = 10.5x

Capex (FY 2006E) = 2.0
FCF (FY 2006E) = $23 million
EV / FCF (FY 2006E) = $172 / 23 = 7.5x

Note: According to the 10k that was filed in May of 2005, the Company has an NOL valued at approximately $37 million for federal and $19 million for state.

Comps:

There is no true U.S. public comp to CAMP although MTI, Sharp, Wistron, and ProBrand compete with them to varying degrees at Echostar and DirecTV on the satellite equipment sector.

History / Acquisitions:

Skybility – acquired in April 2005. Should do $10 million in revenues with 30%+ gross margins in FY 2006. Supplier of transceivers for M2M wireless market – asset tracking and security.

Vytek – Acquired in April of 2004 has been thorn in company’s side. Should be profitable in the December quarter. Company is focusing on profitable business and pruning the marginal revenues.

Risks:

Customer concentration - 2 Customers represent 60% of revenues
Cable and RBOC’s could take share from DBS providers
Company could make poor acquisition with all the cash it generates
Weather dependent

Ownership:

Dimensional Funds is the largest holder with 968k shares or just over 4% of shares outstanding. After DFA, Pacific Edge owns 3.8% and Legg owns 2.3%.

Catalysts:

The onset of digital satellite broadcasting and more complex equipment required for HDTV and DVR’s, CAMP should be able to grow through seasonality and the digital upgrade cycle will benefit CAMP for the next few years
New sell-side coverage
Could use cash for management buyout
Q3 should be very strong –


Disclosure: We own shares of CAMP and may buy or sell shares at any time.


Note: Matt Robison at Ferris Baker Watts has been following the company for 10 years and seems to know it better than most. Also, the Roth Capital analyst doesn't seem to understand the story so he is not very helpful.

Catalyst

The onset of digital satellite broadcasting and more complex equipment required for HDTV and DVR’s, CAMP should be able to grow through seasonality and the digital upgrade cycle will benefit CAMP for the next few years
New sell-side coverage
Could use cash for management buyout
Q3 should be very strong –