TELULAR CORP WRLS
November 30, 2010 - 5:18pm EST by
issambres839
2010 2011
Price: 5.35 EPS $0.00 $0.56
Shares Out. (in M): 15 P/E 0.0x 9.6x
Market Cap (in $M): 82 P/FCF 0.0x 10.0x
Net Debt (in $M): -12 EBIT 0 9
TEV ($): 70 TEV/EBIT 0.0x 7.8x

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Description

Interested in a debt free company paying a 7.5% dividend, while it grows its highly recurring revenue driven business at double digits? Telular’s stable, high margin cash generating business is an investor’s dream. Despite its largest customer reducing orders in March, Telular has rebounded with new customers for its wireless home alarm product and service, Telguard. The company’s recent announcement of a 25% special dividend and the introduction of a regular $0.40 annual dividend ($0.10 per share in quarterly increments) have not been fully discounted. As the market starts to value the company’s cash flow stream and dividend policy properly, expect the stock to soar. At a 5% dividend yield, the stock is worth $8 per share and at a 4% valuation, the stock would be at $10 per share. And with exciting new products and growth above the dividend payout, even those price targets may be conservative.

 

Home Security with Telular’s Telguard

 

Telular’s main product is Telguard, which is a cellular based device that connects to a home alarm system and communicates with the alarm company wirelessly. Telular both sells the product and the back end service to alarm dealers. The dealers then add it on to their service and sell it to homeowners.

 

There are two main reasons you would want a wirelessly armed home alarm. The first is that you would want extra security in case the landline was cut or disarmed. It is extremely difficult to disable a wireless signal. Consider this option like the second line of defense for your home alarm. The second and more important reason is that you don’t have a landline at all. More and more people are only using a cell phone and getting rid of their landline. This is an important trend and an important macro tailwind for Telguard.

 

Great Recurring Revenue Cash Generating Business

 

Telular sells the Telguard product for very little if any profit to alarm companies who then install Telguard into your home. But then, Telular gets $4 to $5 per subscriber per month from the alarm company. This is a wonderful recurring revenue stream for a company with 568,000 Telguard customers.

 

The best part about this business is that it requires little in capex to maintain the backend network. All Telular is doing is receiving the signal from your home and forwarding it on to the alarm companies.

 

ADT Dropped a Bomb in March, but Growth is Already Bouncing Back

 

Tyco (NYSE: TYC) owns ADT, the largest home alarm company in the U.S. and was one of Telular’s largest customers. Tyco also owns a competing company to Telular called DSC. In March, ADT announced that if any independent dealers of ADT installed anything but a DSC product, there would be a surcharge. While this did not hurt any of Telular’s existing ADT installed subscribers, it cut out future growth from ADT, as any future installations affiliated with ADT are most likely not going to be done with Telular, but with DSC.

 

Investors dramatically over-reacted to the news, punishing the stock down, forgetting that Telular still had a large install base, which was churning out a lot of cash and that they might be able to grow outside of ADT. Investors also did not pay attention to the fact that because ADT was so big, Telular was giving them a significant discount, so the true earnings hit was much lower, since ADT customers come at lower margins.

 

Imagine you are an alarm competitor to ADT, what are the chances that you are going to buy a Tyco/DSC product. I would imagine it is close to zero. And so Telular re-doubled their efforts with other independent home alarm dealers with programs such as Telguard Advantage Program, which significantly boosts service and offers discounts to alarm dealers in the program.

 

Also, the beauty of Telular’s products is that they are nearly universal and work with almost every alarm system and technology. So, Telular is preferred over competitor DSC’s solution or Honeywell’s, which only work with DSC or Honeywell systems. Independent dealers like that they can standardize on Telular. In fact, management is now saying that despite ADT’s edict, ADT is still using Telguard and ordering product as some of the alarm systems won’t work with DSC.

 

Finally, while ADT has 25% of the market, only 10% of the market has a wireless alarm system. This strong tailwind, in which more and more people are going 100% wireless in their own home, should continue for a long time. So, even with growth from ADT gone, there is plenty growth to go around.

 

The result is telling: in their last quarter they sold 22,000 Telguard units after selling 16,700 in the previous quarter.

 

Tanklink is Starting to Take Off as Well

 

Telular also developed another product that could wirelessly measure and monitor large tanks of liquids and gases, such as propane. This is mainly a commercial product and Telular calls it TankLink. While the company launched the product a few years ago it has been slow to get off the ground. Telular bought Tanklink in October of 2008 and the business is only now starting to show real momentum. TankLink has higher pricing than Telguard (about 3 times higher) and the company now has to 18,700 TankLink customers. Again, this is a monthly cash flow recurring business just like Telguard. While it has a longer sales cycle, TankLink is finally taking off selling 1700 units in the quarter, or almost 10% of its entire installed base. Look for further growth here.

 

New Products

 

The company is also branching out its offerings, including a new iPhone application that for $2 a month will let you control your home alarm through your cell phone. I can imagine that this might be very popular and another nice cash flow stream for Telular. This product was just announced at the beginning of November. Very importantly, this app is very profitable and is almost all margin.

 

Another growth area is the fire alarm business. For years, government officials have not allowed the primary mode of communication to be cellular for fire alarms, due to fears that the technology wasn’t as reliable.  In the last six months, the government finally allowed cellular to be the primary mode of communication for fire alarms and in October Telular launched a new fire alarm product. This is an untapped market, especially for homes or businesses that have been maintaining a landline because the fire alarm required it.

 

Dividend Policy

 

The market popped on news of the 25% special dividend, positive earnings news and future guidance. But now that the special dividend has been paid, investors seem to be ignoring the $0.10 per share regular quarterly dividend the company announced as well. At current prices, that means Telular is paying nearly an 8% dividend. For a company with no debt, a highly recurring cash flow business with little or no capex needs, this is really unrivaled for a technology company.

 

In fact, screen for companies with positive earnings growth, above a 5.5% dividend yield, with no debt and there are absolutely zero technology companies that qualify outside of Telular on any U.S. stock exchange. And only one other company qualifies above a 5% yield, a software company.

 

Telular is clearly an outlier but why? I believe it is because it is a micro-cap with no analyst coverage and it is not in any significant index. I think for those reasons, the market doesn’t really know it exists right now. But it will start showing up on dividend screens and investors searching for yield will find it.

 

Valuation, Guidance and Potential Upside

 

The market has not fully discounted in that the company will be paying a $0.40 a year dividend and should earn around $0.56 per share in fiscal 2011. Even without the dividend this company is really cheap. Telular should have around $0.80 per share in cash left on the balance sheet after the special dividend, meaning that ex-cash, the company trades for 8 times forward guidance. For a company growing mid-teens with its business model and substantial cash generation, why such a low multiple especially considering they are paying out cash dividends?

 

If the market values Telular at a 4% to 5% dividend yield, the stock would trade to $8 to $10 per share, a 51% to 89% appreciation potential. But, I think even these price targets discount Telular upside. Because if some of Telular’s products such as TankLink, the fire alarm or iPhone app takes off, the company’s growth could really skyrocket. And if this were to become a growth stock, with sales and earnings growing north of 20%, there is no reason this stock couldn’t get a market multiple on dividend yield and earnings and trade at $15 to $20 per share. Consider that fellow comparable Numerex (NASDAQ: NMRX) trades at 23 times fiscal 2010 estimates. There is a lot of upside in Telular.

 

 

Risks

 

There is the obvious risk that alarm dealers decide to use other products. ADT left, and others could as well. However, ADT is the only company that is affiliated with another company making a competing offering. The universal adaptability of Telguard is a positive and so is the low price of its products.

 

There is also a small risk that alarm dealers would want to replace Telguard units already in place. However this would be financial suicide. Once Telguard is in a home, there is very little reason to take it out. The product itself costs around $150 at wholesale. To send a serviceman to come to the house at $100 plus an hour, plus the cost of the product itself, easily puts the cost of a service visit at $400 plus. This a very high price to pay for a product that will generate $4 to $5 a month. This is why when ADT decided to use only its sister company’s products, it was only for new customers and not existing ones.

 

Churn is a risk. Right now it runs at only around 1.5% a quarter, though recently there was one customer that turned off a sizable number of accounts in fiscal q3. This appears to be an exception not the norm.

 

Summary

 

Due to little exposure and no analyst coverage, WRLS represents a real value at current prices, with a very high sustainable dividend yield with little risk, yet lots of opportunities on the upside. The stock can easily trade to $10 per share in the six to twelve months and while you wait, enjoy those outsized dividends.

Catalyst

-7.5% dividend
-new product success
-continued earnings growth
-enjoying a cash cow of a company
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