Sierra Wireless: The Ultimate Value Buy


How many companies can watch their stock plummet by 50% or more in the span of only thirty days and remain competitive on the market?  Most CEOs would be shown the door in a matter of minutes, yet Sierra Wireless is looking like a rather attractive exception to the rule.  That's because Sierra (SWIR on the NASDAQ, trading for $21.96 a share) has made a power-play to stand at the top of the market for development of Internet of Things tech.  Their business model changed drastically in 2014, re-vamping their product line to focus purely on digital communications.  Sierra limited Selling, General, and Administrative expenses to just nine percent growth at the same time that the company slashed research and development by nearly ten percent.  After the initial movement, their revenue climbed by about twenty percent in Q2.  Yet their stock continues to tumble down.  Does this make Sierra a red flag or a green light for investors?

What's An Internet Anyway

You may have seen the commercials where a person locks their house, starts their car, or turns on a television using nothing but their phone.  The Jetsons-esque age of pushing a button to access anything and everything is in its infacy but still very much real.  Sierra Wireless is a major player on this particular market because of their unique position as a machine-to-machine (M2M) device manufacturer while most other tech companies just develop human-to-machine devices.  ABI Research has put Sierra at the top of the revenue chain for M2M manufacturers each year for the past three years, suggesting that you will be hard pressed to find a company with a better market share and a better customer base.  Sierra's customers include big hitters like Tesla and smaller fry like Nespresso, the coffee-machine manufacturers.  Even so, it should be emphasized that Sierra's single focus makes the stock carry far higher risk, risk that has come back to bite them as the company has lost 40% of its value since January of 2015.

Valuation Evaluation

On the face of things, Sierra is trading at half of its 52 week high, which would make just about any investor leap out of their seats in order to snatch up a stock that's undervalued but still capable of solid growth going forward.  Does the conventional wisdom hold water here?  The stock isn't off because of the market but because earnings per share estimates have been steadily dipping downward.  In just the past two months, the earnings per share estimate for 2016 dropped from $1.52 to 1.42.  Likewise, their non-GAAP earnings per share came in at $.22 after a prediction of $.25.  When the company fails to meet up the expectations, investors tend to respond by looking for more steady options on the market.  A closer look at their price and earnings to growth ratio relative to their adjusted earnings turns up a less-than-great final figure of 3.5.  Compare that to their price and earnings forecasts, however, rather than their adjusted earnings, and the ratio falls to a much-more-attractive .25, beating the industry average by a large margin.  While the numbers suggest that Sierra has underperformed in recent months, they also suggest that there's a lot of room to grow and a lot of value for investors to capture.

Going Forward

If the numbers cannot convince you -- lies, damn lies, and statistics, as they say -- then perhaps a few names would be better to swing investors onto their side.  Canaccord Capital released a memo to their shareholders with a very urgent buy rating for Sierra based on their belief that the company will benefit from the long-term rise in web development OEM solutions, a position that few other companies can match.  As soon as Canaccord trumpeted the news, they were followed swiftly by Goldman Sachs, famous for their conservative investment approaches, who echoed the claim and reinforced the value not only of the stock but the long term holdings of a company that has little competition and a world of growth ahead of them.  While both companies have slapped a buy rating on what was, in hindsight, a poor decision (Goldman Sachs said that oil would hit $90 per barrel by the start of 2015), the rest of the financial world has began to get on the bandwagon.  Investors looking for a long-term growth vehicle will have to look a lot longer and a lot harder to find a better choice today than Sierra.

  • The Takeaway: for a month, a year, or even a decade, the time to buy Sierra was yesterday.  The company has excellent cash flow with a surging customer base and almost no competition for the top seed.  Since their stock has traded poorly, reflecting a disappointment at their productivity over the past three months, Sierra can be had for a critical low price tag.  Investors of all stripes should sit up and take notice when such an opportunity falls in their lap.
  • Sierra is part of a number of tech mutual funds, such as the Fidelity Select IT Services Portfolio (FBSOX) which has gained 15% in this year alone.  Investors who prefer less risk in their portfolio may want to capitalize on Sierra's upward trajectory without taking all of the consequences of a poor earnings report or a product-line dud by investing in web tech mutual funds instead of directly in company stock.

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