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Better Know A Stock - Part 19

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22

September 02, 2010 – Comments (7) | RELATED TICKERS: ITI

The inspiration here is all Stephen Colbert's.... he has his series of "Better know a district" so I figured why the heck not... Better Know a Stock, companies that are never followed or too small to be heard of. So here goes that 9000 part series.... =)

Iteris Inc. (AMEX: ITI)

Iteris Inc. operates in the traffic management market that focuses on the development and application of technologies that reduce traffic congestion, minimize environmental impact of traffic congestion, and improve the safety of surface transportation systems. They operate out of three segments, Roadway Sensors, Vehicle Sensors, and Transportation Systems.

Normally I would start off by presenting an extremely bullish case as to why a company should be motoring higher. In this case I'm going to start off with a rather boring bullet-styled list of 19 years worth of financial statemens from past Iteris annual reports and why this stagnant financial history might be about to change for the better.  

Year        Revenue         Fiscal EPS        

2010       $58.06M           $ .06
2009       $69.36M           $ .30
2008       $65.16M           $ .35
2007       $58.30M           $ .09
2006       $50.49M           $ .00
2005       $46.40M           (0.45)
2004       $45.28M           (0.03)
2003       $41.40M           (0.92)
2002       $52.19M           (2.36)
2001       $62.40M           (3.19)
2000       $63.13M           (0.24)
1999       $58.62M           (2.57)
1998       $89.84M           (0.95)
1997       $80.78M           $ .59
1996       $75.22M           $ .40
1995       $65.10M           (0.80)
1994       $63.66M           $ .34
1993       $69.31M           $ .03
1992       $70.26M           $ .02

As you can see by the above, Iteris really didn't figure out their business model until 2006-2007. Prior to 2006/2007 Iteris was primarily focused on vehicle and roadway sensors which regularly comprised up to 91% of their sales early in their company history and up to 70-75% of their sales well into the mid 2000's. Although Iteris does need a solid mix of sensor sales and consulting services, they have really done a nice job of ramping up their consulting service revenues and backlog in recent years and this has led to five consecutive years of profits as evidenced by the table above. In addition, if all goes according to estimates, there should be a 6th and 7th year of profits in the works. 

Iteris has moved right into what I refer to as the "sweet spot" for them which is a 60-40 or 50-50 styled product/consulting mix. Currently, consulting and transportation services account for approximately 45% of Iteris' revenues. We saw gross margins rise dramatically this last quarter to 44% despite what have been relatively moot earnings over the last four quarters. Although Iteris attributes this largely to an increase in sensor sales (and they are right, sensor sales were up while contract revenues were down sequentially), it is vital for them to keep those high margin contract revenues growing in relation to sensor sales and their backlog of 27.5M in contracts shows their commitment to this. 

Their balance sheet has strengthened dramatically over the last four years as the company itself has matured. They currently have an unused 12 million dollar line of credit and boast little to no debt while sitting on 11.7 million dollar in cash as of the most recent quarterly report. Backing out that cash you would be paying only $1 to own what is essentially a growing, profitable company, or to put this in another context, ITI is trading at only 8 times forward earnings once you back out their cash, only 0.85 times my price to earnings growth estimate, and well below their current book value of $1.72.

Let's talk about the business itself. When I think of logical solutions that should be in your portfolio energy comes to mind, along with food, but what about traffic and logistics management? Sure Iteris is a small company, but think abotu this, the need to integrate new technologies into our aging transportation system and simply keep those aging systems running is increasing every year as the amount of automobiles on the road increases. It's clearly up to Iteris to execute their business plan and translate that demand into profits because I see their business model as something that makes a lot of sense to own for a retirement-styled portfolio. 

From what I can tell of management, it's no secret that the company has been geared toward a better product mix recently. With a relatively young board it took time before they finally gelled into a cohesive unit. With the two top ranking members there for 11 & 12 years respectively and the other three for a combined 15, it's understandable why it took so long for Iteris to get itself out of the "muck." 

Iteris has also been maintaining shareholder value well since 2006, and what I mean by this is they finally stopped diltuing the hell out of shareholders. In a 10 year period from 1995 to 2005 Iteris' outstanding shares more than tripled. Since then there has been only a marginal increase (I don't have the exact list in front of me but I remember it being less than 6% of total outstanding shares since 2006). In addition, since January we have seen some 600,000 shares repurchased by insiders, another sign of management seeing strength within the company. 

I think Iteris has the makings of a good long-term hold as long as they continue to build on that contract service backlog, keep their management unit cohesive, and keep shareholder value in mind by not issuing new shares. Iteris seems relatively inexpensive here and should in my estimates be trading at 13-14 times forward earnings with their cash backed out. This would value Iteris somewhere around $2.25 a share based on the figures I have in front of me and I feel it has a significantly brighter long-term outlook.

Those numbers don't lie, and that ain't no bull!

UltraLong

7 Comments – Post Your Own

#1) On September 02, 2010 at 11:40 PM, Option1307 (29.99) wrote:

and this has led to five consecutive years of profits as evidenced by the table above.

Earning $0.00 in 2006 doesn't count as a profit to me, sorry to nitpick :)

I remember you mentioning this stock way back when in your super blog and while I was intrigued by it back then I just couldn't see what exaclty their growing force would begoing forward. Well, I guess I wasn't comfortable with it is the better way to put it.

Anyways, it is still pretty cheap and they have only increased their cash position the last few quarters, I might have to look into this one some more.

Another great write up, +1.

Glad to see you back to blogging, hope things are looking up for you UL.

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#2) On September 04, 2010 at 12:44 AM, TMFRhino (98.11) wrote:

Just wanted to say that I'm glad to see you're back UltraLong, I wish you the best.

-Eric Bleeker (TMFRhino) 

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#3) On September 04, 2010 at 3:09 PM, HarryCaraysGhost (99.71) wrote:

Hi UL,

Hope you are doing well.

Would you care to enter a contest-

A contest of sorts.

Best regards

John.

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#4) On September 05, 2010 at 12:20 AM, ikkyu2 (99.29) wrote:

Nice pitch.

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#5) On September 06, 2010 at 2:12 PM, TheLastYetti21 (30.33) wrote:

Option: " remember you mentioning this stock way back when in your super blog and while I was intrigued by it back then I just couldn't see what exaclty their growing force would begoing forward. Well, I guess I wasn't comfortable with it is the better way to put it."

In my opinon, this is a growth company trading at a very low valuation; I see many positive catalysts in the future that could propel this stock higher. First, the industry is a niche and I see the company expanding more into overseas markets in the future. For instance, the China traffic jam mess is just calling for ITI services in China. Also, after listening to ITI past two conference calls their CEO mentioned that the European Union is considering mandating ITI roadway sensors on all commercial trucks staring in 2014. That would be a huge market for ITI. The headwinds right now are the fiscal situation of municipalities and governments, which are some of ITI biggest clients. Municipalities are struggling to balance budgets in this challenging economic climate and this has lead to some of ITI business contracts slowing. However, road repairs and traffic management are usually high priorities and I see this spending picking up.  As UL mentioned, ITI is trading below book with a strong balance sheet therefore I see very little downside risk at this price. Fool On!Disclosure:  I am long ITI

 

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#6) On September 06, 2010 at 4:00 PM, Haugurafpeningum (30.30) wrote:

I´m sure that there is something better out there. I would like to see more consistent earnings growth before buying into the stock. I can´t say that i´m familiar with ITI´s business but my guess is that there will be blood and a lot of competition in this seqment.

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#7) On September 09, 2010 at 1:08 AM, umps15 (31.14) wrote:

obama just announced 50 billion in infrastructure updates. Maybe ITI will see a piece of that?

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