Pointer Telocation (PNTR) was one of the Fund’s big losers in 2015, with a decline of almost 30%. We attribute the decline to a spin-off of its unrelated roadside assistance (“RSA”) business that was scheduled for 1H 2015, but postponed (it is now scheduled for May), and lack of top-line growth due to exchange rate deterioration of several currencies in countries in which they have operations. With a 1% increase year-to-date in 2016, we count Pointer as a major winner, but well below fair value.
The company recently reported 4Q and gave a very upbeat view on 2016, with strong growth expected in its high margin services businesses, a stabilization in currencies, major new opportunities in Brazil, and multiple new products for asset tracking, the connected car segment and the Internet of Things.
We believe that the company’s upcoming spin of its low-margin RSA (12.5% gm) business will be a catalyst to take shares to higher levels. As a standalone Mobile Resource Management (“MRM”) business Pointer will look far more attractive with 48.2% gm, versus the current 33.9% for the combined company.
Pointer is trading at under 5x EBITDA, versus CalAmp (CAMP) at almost 3x that multiple, and has a double digit free cash flow yield. If the company grows its MRM business 10% in 2016 (management was very comfortable with that figure on its recent call – and we suspect upside), they should be able to grow EBITDA by 20-25% based on incremental gross margins in excess of 50%.
We suspect that as investors see the far superior growth and margin profile of stand-alone Pointer, shares should re-rate (for example, at an 8x EV/EBITDA multiple, the stock would be a double from current levels). We believe the company is well positioned for several years of double-digit top-line (and faster bottom-line) growth, and trades at an unsustainably low multiple in a consolidating industry (CalAmp recently agreed to acquire perennially money-losing LoJack). Even a modest re-rating would be material to the stock’s current share price, which we view as significantly disconnected from company fundamentals.
The above post has been excerpted from a letter of Dane Capital Management.
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