Investors are clinging to the suspicion that there’s something amiss at Avigilon Corp., even as the evidence points to the contrary.
Avigilon is precisely the same growth business it was before an unexpected management departure sparked a selloff driven by pure speculation. The company, which designs and makes high-definition surveillance equipment, is on a steep growth trajectory, while increasing its margins in a segment of the market primed for a swell of demand.
Investors should ignore the noise, said Peter Hodson, head of research at 5i Research. “If you just looked at their growth rate and their multiple, if you didn’t know anything about the company, it would screen really, really well.”
Until May, Avigilon was a Bay Street darling, a rare Canadian tech hit that consistently delivered results. It established a market-leading position in the supply of high-definition surveillance cameras to replace their outdated analog predecessors.
The company’s stock returned 190 per cent and 160 per cent in 2012 and 2013, respectively. Market cap surpassed the $1-billion mark in late 2013, landing the company in the S&P/TSX composite index and generating a new level of attention.
The hype surrounding Avigilon went into reverse in May when the company’s chief financial officer, Bradley Bardua, resigned the day before first-quarter earnings were to be announced. The company cited personal health reasons. Mr. Bardua was the third executive to leave Avigilon within six months.
It was a bizarre bit of timing that investors took as a cue to bail on the company. “All of a sudden, everybody was concerned about everything,” Mr. Hodson said. Investors drove the stock as low as $17.41, a 50-per-cent decline from its year-to-date intraday high. A portion of the losses have been made back, but Avigilon’s shares are still 35 per cent below their January peak.
Some analysts were also taken aback. “Maybe there is no fire, but certainly some smoke,” Steven Li, an analyst at Raymond James, said in a report, noting that the departure was “too coincidental for comfort.”
Then the company reported its earnings, posting a 74-per-cent increase in revenues over the prior year, along with an ever-increasing gross margin, which rose to 57 per cent.
“We believe that these results confirm that management continues to execute on the tremendous opportunity, despite this abrupt senior management change,” Justin Kew, an analyst at Cantor Fitzgerald, said in a note. Eight of the 10 analysts covering the stock rate it a “buy,” while the average price target is $36.28, down a few dollars from as recently as April, but still a 61-per-cent premium over Friday’s close.
There’s nothing to suggest an internal crisis is taking place at Avigilon as investors fear, Mr. Hodson said. “There’s no tangible proof that there’s anything going on at all that’s even slightly negative.”
The legitimate concern for the company lies in its competitive position, he said. Avigilon has no North American patents to protect it from challengers, of which there is a long list in the video surveillance market.
Skeptics of Avigilon’s staying power have long asserted that a powerful competitor could squeeze the company on price. And yet, Avigilon’s improving margins are solid evidence that price pressure has not yet materialized.
The latest likely contender emerged when Canon announced in mid-June a deal to acquire Milestone Systems, which makes software for the digital surveillance market. Canon said it aims to a “take a leadership position in network video surveillance.”
Coming from an imaging giant such as Canon, those words might make Avigilon’s shareholders shudder. But they should take comfort in Avigilon’s strength as an “end-to-end” market leader on both the software and hardware sides of the business, Thanos Moschopoulos, an analyst at BMO Nesbitt Burns, said in a note.
“We believe that Canon would have to do considerably more work on the camera side in order to be more competitive with Avigilon,” he said. Plus, other big conglomerates such as Cisco and GE have made incursions via acquisition into the digital surveillance space with pretty poor results, he added.
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