Telit Communications (LSE: TCM) released its annual results this morning and its shares rose as much as 16.5%, hitting 360p at point, although they have since fallen back. The company, which describes itself as “a global enabler of the Internet of Things (IoT)”, posted double-digit revenue and profit growth.
Chief executive Oozi Cats commented on the company’s “strong competitive positioning and global reach”. He added that “The IoT market is rapidly gaining momentum … We are very well positioned to address the numerous opportunities”.
Telit reported an 11% rise in revenue, a 19.9% rise in adjusted EBITDA and a 21.7% rise in adjusted earnings per share. The latest results continue an impressive record of growth, as shown in the table below.
|Adjusted EBITDA ($m)||13.1||17.3||26.9||34.7||45.3||54.4|
|Adjusted EPS (cents)||4.5||8.6||14.9||18.4||21.7||26.4|
Even after today’s rise, the shares are on a P/E ratio of just 16.7 — a very cheap rating for a company on such a strong growth trajectory.
Odder still, Telit is easily the most heavily shorted company on the AIM market. Six institutions, with an aggregate short position of 10.7% of the stock, are betting on the company’s shares falling.
Not so impressive
I’m not privy to the reasons why these institutions have taken short positions in Telit but I can see why an investor might want to short the stock.
The table below shows some key numbers taken from Telit’s cash flow statement and some free cash flow (FCF) calculations that I’ve done.
|Net cash from operating activities ($m)||15.4||5.4||25.4||46.2||41.2||47.7|
|Capitalised development costs ($m)||(3.7)||(7.7)||(9.9)||(26.1)||(26.1)||(30.8)|
|Other investing cash flows ($m) (excluding acquisitions)||(11.6)||(6.4)||(9.4)||(11.9)||(9.5)||(10.7)|
|FCF per share (excluding acquisitions)||0.1 cents||(8.4) cents||5.8 cents||7.4 cents||4.9 cents||5.4 cents|
|FCF per share (including acquisitions)||(23.7) cents||(13.6) cents||(4.3) cents||5.5 cents||4.5 cents||(8.0) cents|
|FCF per share at average annual acquisition ($9.5m)||(9.5) cents||(17.7) cents||(3.3) cents||(1.1) cents||(3.4) cents||(2.9) cents|
Net cash from operating activities looks good, having risen from $15.4m to $47.7m over the six years. However, capitalised development cost (deemed an investing activity) is open to management discretion (or, for the cynical, manipulation). Those of a cautious or sceptical disposition might be inclined to consider it an operating cost. In Telit’s case, it has escalated dramatically from $3.7m to $30.8m. If we were to treat it as an operating cost, the progression of net cash from operating activities would be a far less impressive $11.7m to $16.9m, rather than $15.4m to $47.7m.
Either way, though, capitalised development cost comes into the FCF calculation. For the latest year, my sums say FCF (excluding acquisitions) was 5.4 cents. As such, while the P/E ratio is a relatively cheap 16.7, the P/FCF is a very expensive 81.3.
Furthermore, it’s arguable that acquisitions are a routine part of Telit’s business activity. If we account for them as such, FCF is even worse (the second-from-last row in the table). Finally, as acquisitions are lumpy from year to year, we might use the average annual cost of $9.5m. This results in negative FCF each and every year (the last row of the table).
The bull case for Telit is that IoT technology is going to be huge and that the company’s revenue and earnings are growing fast. The bear case is that while multi-million-dollar acquisitions are producing large annual increases in revenue and earnings, Telit continually delivers little (at best) or no FCF.
I incline to the bear view that Telit is grossly overvalued on an FCF basis. As such, I have to rate the shares a ‘sell’.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.