With the shares down around 40% from highs achieved earlier in the year, we might be seeing a good opportunity to buy into Telit Communications (LSE: TCM).
Growing with the Internet of Things
The firm designs and makes internet-of-things (IOT) modules — the electronic components that other manufactures design into their devices so they can send and receive data over cellular and other networks. Telit also operates a connectivity and data/application service, which helps people use their IOT connectivity, thus generating income for Telit as the IOT expands.
Telit is doing well, as the firm’s financial record shows:
|
Year to December |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Revenue ($m) |
132 |
177 |
207 |
243 |
294 |
|
Profit before tax ($m) |
6.45 |
2.23 |
4.91 |
11.95 |
13.91 |
|
Net cash from operations ($m) |
9.31 |
15.36 |
5.39 |
25.37 |
46.22 |
Well-balanced growth in revenue, profits and cash flow comes from organic expansion and the company’s acquisition strategy. However, despite that record, the shares are down since the highs achieved earlier in the year and the most recent trading update could be to blame.
In October, the chief executive said that some of Telit’s customers have postponed some of their purchases in order to deploy LTE CAT-1 in their new products, which Telit expects will be certified by the operators and commercially available in early 2016. On top of that, the company has seen delays in a few customers’ projects, which will mature in 2016.
That looks like a knock to short-term revenue expectations — enough to kick down the share price — but Telit’s top executive remains confident that longer-term growth forecasts are still strong. To me, that means the fallen share price could be a good opportunity for investors.
City analysts following Telit Communications expect earnings to grow by 7% this year and a further 44% during 2016. Meanwhile, at today’s 212p share price Telit trades on a forward price-to-earnings (P/E) ratio just over 11.
Growth on track
Telit Communications has a market capitalisation around £239 million, and it is common for growth opportunities to take shape in smaller companies. One investing strategy is to combine higher-risk smaller firms with larger stalwarts in a portfolio, so Telit could work well alongside BT Group (LSE: BT-A), for example.
BT has a market capitalisation of more than £41 billion and describes its fibre broadband rollout as a success story as the company continues to invest heavily in the area. The firm’s open access fibre network passes 24 million premises and BT intends to expand it further. BT has a goal to get ultra fast broadband to ten million premises by the end of 2020. Right now, the firm reckons fibre net additions are up 21% and five million homes and businesses are connected to the service — which gives some idea of the yet unrealised potential.
At today’s 488p share price, BT trades on a forward P/E ratio of just under 15 for year to March 2017. There is a forward dividend yield of 3.1% for year to March 2017 with the payout covered more than twice by forward earnings. City analysts following the firm expect earnings to expand by 7% that year. The valuation looks full, but if BT continues to deliver growth that situation could be justified. BT certainly seems worth watching with a view to buy the shares on dips and down-days.