Lojack Corporation LOJN
November 23, 2010 - 11:34am EST by
Bill
2010 2011
Price: 4.95 EPS -$0.03 $0.60
Shares Out. (in M): 18 P/E NM 8.25X
Market Cap (in $M): 91 P/FCF 15X 6X
Net Debt (in $M): -31 EBIT 5 17
TEV ($): 60 TEV/EBIT 11.8X 3.6X

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Description

 

Thesis:  Lojack is an underfollowed, small-cap company offering investors the potential to double their money.  With the company having undergone a successful restructuring, and auto sales (SAAR) expected to grow over the next few years, Lojack appears to be dramatically undervalued.   Lojack is a cash generative business trading at 2.5X 2011E EBITDA.  Quarterly earnings beats and the continued growth of the business are the most likely events to catapult the stock price. 

Lojack provides the technology designed to assist law enforcement in locating, tracking and recovering stolen vehicles.   The Lojack system is based on Radio Frequency (RF) technology that is efficient even when the vehicle is located underground or in a garage.  The system operates as a silent tracking device (hidden in one's vehicle) that is tracked by the police when one reports their vehicle stolen.  In over 20 years of existence, the Lojack stolen vehicle recovery system has recovered more than 90 percent of stolen vehicles. 

Lojack separates its business into three operating segments: North America, International and All Other.  As of the end of 2009, North America comprised 71% of total revenues, International 27%, and All Other 2%.  In North America the company sells products in 28 states as well as the District of Columbia.  Internationally, the company operates in 30 countries throughout Europe, Asia, Africa, Latin America and through their wholly owned subsidiary in Italy.  "All other" is primarily Lojack's SafetyNet which provides the technology to track and recover people at risk (Examples include people with Alzheimer's or Autism). 

Once deemed a high profile "growth stock" (trading in the mid $20s), Lojack earnings declined significantly during the downturn.  With SAAR falling off a cliff, the stock price went from slightly north of $13 in March, 2008 to a low of $2.53 in March 2009.  In that timeframe Adjusted EBITDA went from $22 million (2008) to slightly negative in 2009.

So what has changed since then that makes this a compelling investment?  The company has significantly lowered its cost structure, is growing it's international sales, and SAAR has improved. In June of this year Lojack announced that it was laying off 46 employees as part of a restructuring that would save the company $7.4 million annually starting next year.  In the most recent reported quarter (first quarter of fully recognized cost savings), the company reported Adjusted EBITDA of $5 million and EPS of $0.15.  Simple math shows that if you annualize last quarter's results, with an enterprise value of under $60 million and a stock price of $4.95, LOJN would be trading at under 3X EV/EBITDA and P/E of 8.25X. 

In addition, the company reported its third consecutive quarter of year-over-year revenue growth, ending a 2 year decline.  With the recent reported SAAR data (12.2 million in October- easily surpassing analysts' expectations) and the forecast for SAAR growth anywhere from 7-9% next year, LOJN has significant upside potential to next year's numbers. 

How much upside is there?  Our research indicates that domestic revenues will grow in line with retail car sales, while International revenues will grow 6-7% above International retail sales.  In terms of incremental margins, they range anywhere from 55-70% domestically and 65-80% internationally.  Taking a conservative modeling approach we arrive at EBITDA of $23.5 (2.5X EV/EBITDA), EPS of $0.60 (8.25X P/E), and FCF of slightly north of $15 million or approximately 16.8% FCF Yield.  The company CapEx rate is typically about $1 million a quarter (we use $5 million for the year to be conservative), taxes on an annual basis of $2-$2.5 (we use $2.5 million) and interest paid of approximately 800K. 

Based on our estimates we derive a 12 month price target of $10.  At $10 per share LOJN would trade slightly under 6.7X EV/EBITDA and 16.6X P/E. Our forecast implies little to no growth in SafetyNet, due to a lack of visibility, although giving us a free option should SafetyNet gain traction (we believe that SafetyNet could increase our price target an additional $1 per share).  

It's important to note that there's some seasonality in the business.  First quarter tends to be the weakest and 2011 will be no different.   Also of note is that insiders have been purchasing stock as recent as mid-August.  The chairman of the board bought 30,700 shares at an average price of $3.67.  The illiquidity in the stock (average volume of 30K shares) makes it difficult to acquire a significant position.  However, if patient I believe one will earn a great 1 year return.   

 

Risks:

1) Illiquidity

2) Substantial double dip recession that would more than offset cost savings

 

Catalyst

1) Quarterly earnings beat above projections
2) Potential partnerships that could compel the companies SafetyNet and/or Cargo Business
3) Potential acquisition or LBO, given the company's valuation
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