The story has become too familiar now.
CalAmp (CAMP), at one point one of my rare “very bullish” calls that did not pan out at all, delivered decent fiscal 2Q21 financial results. After shares spiked in after-hours trading, they declined quickly and sharply on Friday. This bullish knee-jerk reaction followed by a selloff within one or two trading sessions is exactly what had happened in May and again in June (first and fourth fiscal quarters, respectively), suggesting to me lack of confidence in longer-term buying and holding.
Regarding the headline numbers, YOY revenue decline of 10.4% came in seven percentage points ahead of consensus, which was a nice surprise. Non-GAAP net loss per share of three cents, however, lagged expectations for a breakeven quarter. Guidance was not offered due to the well-known uncertainties in a pandemic year.
Credit: CalAmp’s home page
A look at second-quarter results
It is hard to tell exactly what caught analysts by surprise regarding CalAmp’s $6.6 million revenue beat – the widest since 2016. Software and subscriptions, the company’s crown jewel and best hope for future value creation, saw revenues climb 8%. As a result, the revenue mix towards this segment remained at 40% of the total, aided by the fairly recent acquisitions, which not long ago had been set by the management team as a long-term target. See graph below.
The problem, as usual, was the product side of the revenue equation. The Caterpillar (NYSE:CAT) account, CalAmp’s largest that represented 16% of sales in fiscal 2Q21, seems to have done just fine. The headwinds came from SMID customers slowing down telematics orders, a direct result of the macroeconomic uncertainties caused by COVID-19. In the earnings call, the management team appeared more optimistic than concerned, given (1) the eventual climb out of the current crisis, and (2) a 3G-to-4G upgrade cycle expected to play out into fiscal 2022.
Source: DM Martins Research, using company reports
Regarding profitability, gross margins of less than 37% looked soft compared to last quarter, but a one-time warranty charge of $1.4 million seems to explain nearly all the deterioration. Partly for the same reason, adjusted EBITDA margin of 6.5% also failed to impress. Note that, at least before this year’s CEO transition, the company had hoped to see long-term consolidated EBITDA margin reach 20% – a target that now seems unreasonable, amid a turbulent 2020.
Lastly, it is worth taking a quick look at liquidity and balance sheet. Despite all the challenges, CalAmp has managed to produce positive FCF: about $6.5 million so far in the fiscal year. Regular cash inflow plus dry powder in excess of $100 million, or nearly one-fourth of total assets, suggests to me that CalAmp is unlikely to run short of liquidity.
Lots of unrealized potential
CAMP is the kind of stock “that I want to want to own” (word repetition added on purpose), given (1) the fundamentals and (2) the opportunities ahead.
On the former, consider the company’s software and subscription business. It now generates revenues at an annual run rate of $135 million, grows the top line at a high single-digit pace, and boasts a healthy adjusted EBITDA margin of 22.5%. Should this piece of the business alone be valued at the same 23x EV/EBITDA that Verizon (VZ) paid on Fleetmatics, it would be worth $600 million – more than twice CalAmp’s total market value today.
On the latter, I have to imagine that the worst has been left behind for the Irvine, California-based company. The business model transition from equipment to services is well underway. COVID-19 and the ensuing recession are certainly concerning, but they should not be for much longer than a couple of years. If the management team is correct, a 4G upgrade cycle could breathe life into the struggling telematics business. And lastly, despite having expanded since the March bottom (see graph below), CAMP’s valuations still look de-risked, at least compared to the rest of the market.
I am still hesitant, however, to turn bullish on this name. CalAmp has a long history of being “set for success”, but never quite achieving it. A few years ago, when shares traded above $20, the issue was the satellite business and the overdependence on Caterpillar. Then, it became supply chain challenges driven in part by trade restrictions, which impacted the telematics business. Now, we are facing a recession and tight client budgets.
Following the same trends, the stock has not shown sustainable traction in at least two years. Whenever investor optimism timidly surfaces, profit-taking sends the stock crashing back down – which has been the case in the past three earnings seasons.
For these reasons, I remain hopeful about CalAmp as a business, but do not have convictions that investing in the stock is prudent for most people. A feasible strategy here may be a barbell approach: investing primarily in safe assets and adding very small exposure to names like CAMP that could as easily head substantially higher or lower. Otherwise, I prefer not to touch the stock and choose to follow the CalAmp story from a safe distance.
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Disclosure: I am/we are long VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.