Sierra Wireless Inc.
Thursday’s close: $11.72 a share
52-week trading range: $6.41 to $12.20 a share
Annual dividend: none
Analysts’ ratings: There were 7 buys, 4 holds and no sells, according to Bloomberg data. Targets ranged from $9.99 a share estimated by Jefferies & Co. analyst Peter Misek to $17.02 a share by Paradigm Capital analyst Daniel Kim.
Recent history: Shares of the Richmond, B.C.-based wireless data communications equipment company have gained a robust 62 per cent over the past year. Sierra Wireless, whose shares hit a 52-week intraday high earlier this week, has gained more attention lately after it negotiated a deal in late January to sell its AirCard UBS wireless modem unit [for Internet on the go] to Netgear Inc. for $138-million (U.S.) in cash plus $6.5-million in assumed liabilities. After the transaction closes this month, Sierra Wireless expects to have $100-million in available cash to focus on its machine-to-machine (M2M) technologies that allow wireless and wired systems to communicate with other devices.
Manager insight: Sierra Wireless, whose shares were trading in the $8-range prior to the recent deal, has emerged as a more compelling story now that it will become a pure-play focused on its M2M business. It is expected to benefit from a secular trend in the wireless revolution dubbed the “Internet of Things,” where connectivity is expanding to include assorted machines and devices - from cars to appliances and fire-alarm systems - as opposed to people just communicating with each other through smartphones and tablets.
“This [M2M technology] is an area that I think will have double-digit growth over the next five or six years,” says Frank Mersch, co-founder of Front Street Capital, and who began buying Sierra Wireless shares in December for his funds. “It will start slow, but I think it will start to accelerate in about the next two years.”
Sierra Wireless can focus on this potentially high-growth niche now that it has sold its AirCard division that had become a low-margin and a “fairly mature business,” said Mr. Mersch. “The company historically made the best UBS modems in the world, and were dominant in that space, but [that business facing tough competition from Chinese companies] has been fairly commoditized.”
With $60-million in cash remaining on the balance sheet and no debt, the company now has about $160-million to seek acquisitions, the portfolio manager said. “If they can buy businesses that give a better return than the cash that they have on the balance sheet, the stock will reflect that fairly quickly. I don’t know the timetable, and what they are looking at, but obviously they are sitting on a lot of cash, and a lot of people are going to approach them.”
Sierra Wireless’ stock has had a nice run, “but in four or five years, if they execute the way I think they can, I think it could be a $40 stock,” said Mr. Mersch. “I have been very bearish on the Canadian dollar so I also want to focus on companies that have costs in Canadian dollars...but the bulk of their revenue and earnings come from south of the border.”