Pat McKeough recently replied to an Inner Circle member looking for an opinion on Vecima Networks. The broadband equipment maker saw revenue and earnings soar in the second quarter. Still, that wasn’t without acquisitions, says Pat.
Q: Pat: Would you have any Inner Circle feedback on Vecima Networks? Thanks.
A: VECIMA NETWORKS (symbol VCM on Toronto; www.vecima.com) designs and make technology for the broadband equipment market.
Vecima first sold shares to the public in 2005 and began trading on the Toronto exchange at $7.50.
The company’s technology provides a final network segment for service providers, such as cable companies, to connect their systems directly to end-users. This is commonly referred to as “the last mile.”
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Due to regulatory requirements, all North American cable operators are completely turning off their analog television broadcasts. However, there are still many cable subscribers who can only get analog signals, and Vecima’s main products address this market.
For example, the company’s Terrace products let cable operators convert their digital video signals into the older analog signals. These products are commonly used in apartment complexes and other multi-room buildings. The Terrace QAM line of products lets cable operators with customers in the hospitality industry, such as hotels, distribute multiple high-definition video signals to many rooms without the use of digital set-top boxes in each room.
Vecima also has two other businesses:
YourLink operates four small cable television systems in British Columbia and provides wireless broadband Internet service in Saskatchewan and British Columbia. These systems provide video services and broadband Internet access to around 16,000 subscribers.
FleetLynx makes GPS systems to dispatch and track trucking fleets; they include oil and gas fracking trucks, oil tankers, pickup trucks and other vehicles.
Growth Stocks: 90% of revenue is recurring
Earlier this year, Vecima purchased Contigo Systems Inc., a Vancouver-based private company. Contigo provides GPS systems for fleet management, asset tracking and personal safety for small- to medium-sized fleets.
Contigo provides several tracking devices as well as a state-of-the-art web platform. The company’s two main products are RideAlong, for commercial vehicle tracking, and Alert & Assist, for lone worker safety. Contigo’s revenue is about $5.0 million annually, from over 15,000 subscribers. More than 90% of that revenue is recurring. Contigo should complement Vecima’s FleetLynx business.
In its fiscal year ended June 30, 2016, Vecima’s revenue rose 19.2%, to $108.4 million from $90.9 million in fiscal 2015. Earnings per share jumped 35.6%, to $0.99 from $0.73. The company does 77% of its business in the U.S. and the high U.S. dollar has increased the value of sales from that country. The growing demand for higher-profit-margin Terrace products has also lifted earnings.
Vecima holds a high cash balance of $74.2 million, or $3.31 a share. It has low debt. The company spends a high 10% of its sales on research and development.
The stock trades at 8.5 times its latest 12-month earnings of $0.99 a share. The shares yield 2.6%.
Inner Circle recommendation: HOLD for aggressive investors.
For our recent report on a big acquisition for a U.S. growth stock. read Verizon ready to expand with Yahoo acquisition.
For our views on making the most of small cap stocks, read Small cap growth stocks have strong potential for gains—but can be volatile.
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