Yahoo Finance Why Sierra Wireless May Be a Good Pick for the Long Run
Sierra Wireless (NASDAQ: SWIR) is having a tough time satisfying Wall Street. Shares of the Internet of Things (IoT) specialist have cratered over the past six months or so because of a string of quarterly reports with poor guidance numbers. Sierra's decline could continue -- the company's recently released fourth-quarter results were accompanied by weaker-than-expected guidance numbers once again.
Let's look at what's going wrong with Sierra and if it can bounce back.
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A closer look
Sierra's guidance for the quarter including March calls for $185 million in revenue at the midpoint of its range, leading to adjusted earnings of $0.07 per share. Consensus forecasts originally called for $0.20 per share in earnings on revenue that's close to the higher end of its guidance range.
By comparison, Sierra had earned $0.24 per share on revenue of $161.8 million in the prior-year period. This means the company will post a nice 14.4% year-over-year jump in revenue if it hits the midpoint of its guidance range. This would be better than the 12.6% revenue increase Sierra reported in the latest quarter, though its growth can outpace estimates since the company seems to have a habit of under-promising and over-delivering.
But the bottom line is what seems to be worrying investors because the IoT specialist's top-line growth is going to be decent. The guidance indicates that Sierra's earnings will take a big hit, but this is going to be a one-off event. Last year, Sierra had acquired device-to-cloud solutions specialist Numerex for $107 million.
The acquisition was completed in December, and the integration of Numerex into Sierra's business will cause some short-term pain. Specifically, Sierra expects to record high one-time costs to upgrade Numerex's network and migrate the latter's customers to its own platform. This maneuver will restrict Sierra's supply of components to its own customers, thereby negatively impacting its revenue and adding to its cost of goods sold.
In all, Sierra estimates that these moves will cost $4.5 million in a one-time non-GAAP restructuring charge. This will take out a sizable chunk of its adjusted earnings, which were $7.7 million in the first quarter of 2017. So, it isn't surprising to see why the chipmaker is calling for such a massive contraction in its bottom line this time, though it will eventually lead to long-term gains.
The outlook for Sierra
Sierra is upgrading Numerex's network because it is going to be crucial in boosting its sales -- the chipmaker had originally forecast that Numerex will increase its recurring revenue to 10% of total revenue as compared to just 4% before the acquisition.
An increase in recurring revenue should ideally boost Sierra's margins in the future. It costs less to service subscription customers once they are locked into a company's ecosystem as compared to acquiring new customers. In fact, Numerex has a superior margin profile when compared to Sierra -- its last quarterly report before the acquisition revealed a gross margin of almost 58%.
By comparison, Sierra's fourth-quarter gross margin was 33.8%, so the short-term pain from the Numerex acquisition will eventually turn into gains going forward. But this is just one of the many catalysts for Sierra Wireless; a number of new customer ramps are on the way.
The company claims to have landed its second-largest automotive design win ever with a large international customer. Sierra didn't get into the details, but it did mention that shipments to this new customer will begin from the second half of 2019. Before that, Sierra will start shipping its high-speed connectivity modules to Volkswagen this year.
Investors will need to be patient. Sierra expects its automotive business to start generating income from next year and make a bigger contribution to its overall business from 2020. So Sierra Wireless' troubles shouldn't last, and this makes the company a good bet at its current valuation.
The recent drop in Sierra shares has made the stock cheap with a price-earnings ratio of 22.6, while the industry average stands at 35.1. What's more, the stock trades at 17.5 times forward earnings, which points toward expected earnings growth ahead.
Sierra Wireless remains a good bet to take advantage of the Internet of Things. Its cheap valuation and strong catalysts such as the automotive market and smart cities should make investors give this stock a second look.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool has a disclosure policy.
