Last year, I laid out a handful of “secret SaaS” businesses. SaaS companies are getting massive valuations because they have highly recurring revenues (which provides earnings visibility), have low churn (highlighting how much customers like their product), and are also asset light. Many other, non-software businesses have this too, people!
I recently did a post of International Flavors & Fragrances, which seems like a secret SaaS business. IFF’s products are mainly food additives that impart taste or fragrance. Food is highly recurring and these products are mission critical. Good margins, low churn, highly recurring.
But today’s company, Ituran, won’t seem that secret. Ituran actually sells software. More importantly, I want to show that Ituran’s stock does not reflect its strong business characteristics.
Ituran started out in the 1990s as a provider of SVR tracking services (Stolen Vehicle Recovery). The company is based in Israel, where insurance companies mandate the use of SVR services as a prerequisite for providing insurance in medium to high end vehicles. They also grew in Brazil, where car theft is high. In fact, 70% of Brazil is uninsured due to high amounts of vehicle theft. Therefore, Ituran is a cheap solution.
As you can see, Israel and Brazil are the core markets. The company has grown subscribers organically very well and got a boost from the Road Track acquisition back in 2018, which also helped expand it into other countries like Mexico, Columbia, and Ecuador. Organically though, it’s grown subscribers at a 12% CAGR.
In its core countries, Ituran uses RF network technology to do this tracking, which has some advantages over GPS. For example, GPS services require clear view of the sky with line-of-sight to at least three satellites within the GPS constellation. The terrestrial network technology that Ituran uses does not require line-of-sight and signals are not easily interrupted. It’s also much harder to jam the signal. Lastly, the system can be connected to the anti-theft system in the car, so you don’t have to wait for the vehicle to be reported stolen first.
According to ITRN, the average recovery time is 20 minutes.
However, there are some drawbacks, such as the need to install physical infrastructure in the region it operates. These base stations communicate with each other and help keep a precise location of the car. That said, capex for the company is still really low and ITRN has said they will be using a GPS platform to expand into new regions.
With its technology, the company also expanded into fleet management. Fleet management would be something like tracking the usage of a corporate fleet, or letting truckers no about “no go” locations on their routes (perhaps a low hanging bridge).
Ituran’s services have been used by corporations with large fleet vehicles. Ituran uses real-time information to track driver behavior and can alert a corporation if the driver is being reckless. This is a low-cost tool for managers of fleets to set benchmarks and hold drivers accountable and in the grand scheme, likely lowers costs for the customer.
Finally, they also use their technology for usage-based insurance (“UBI”). Insurance companies use Ituran’s plug-in to determine how much users drive and also how they drive for custom pricing.
For insurance companies, this helps them stay competitive by saying, “hey, you could lower your insurance if you are a better-than-average driver or just drive less.” And consumers think, “hey, I’m a better than average driver and don’t drive that much, so maybe I can get a better rate than something fixed.” Truth is, everyone thinks they are a better-than-average driver.
What’s interesting about this information is that Ituran also knows when the car gets in an accident. It can see the exact location of the scene and alert emergency services. Ituran can also provide hard evidence of what actually happened in the accident (down to the G-forces, driver action-reactions, etc). Insurance companies and customers also like this because it provides clear evidence of what happened and can also save lives by cutting response times.
Significant Upside on Conservative Estimates
I think Ituran’s stock looks very cheap. As you can see from the snapshot below, Ituran has grown at a strong clip over time, has really high gross margins and EBITDA margins and generates good FCF. The other thing I should mention is that management says churn is consistently around 3%, which helps stabilize results.
On my numbers, Ituran’s stock is trading at a 10% FCF yield, which is significant when you don’t really have much debt. I also don’t assume they see 2019 revenue again until 2023, despite India launch, despite Brazil bottoming out of a recession, and despite a recovery from COVID-19.
Note: there were some accounting changes that moved expenses around + the acquisition, which is why R&D for example looks so odd over time.
Areas for Growth. SaaS businesses also get high valuations because of their growth characteristics. Ituran has a lot of white space available for growth to boost the stock awareness:
- India has 250M+ registered cars. If the company achieved 0.5% penetration, that would be 1.25MM incremental users.
- The challenge with India versus some of the other locations will be what you can charge, but even at $60 a year across 1.25MM users would be $75MM of incremental revenues (or a 30% increase to where they are today)
- Mexico, Columbia, Ecuador.
- Ituran is already big in South America through Brazil and Argentina, but could expand the playbook into these countries which it entered via its acquisition of Road Track
- Ituran generates strong FCF and currently has very little debt. In my model, I assume they continue to pay down debt to zero, but they also could continue to acquire players to enter into new geographies, like they did with Road Track (albeit, that was ill-timed, as discussed below).
- Other Optionality.
- I like companies that have shown they can pivot. Ituran pivoted from mainly a stolen vehicle recovery business to a fleet management business to an insurance company. What else can they do?
- With a cash rich balance sheet (net debt zero right now), this gives them a lot of optionality
Why does this opportunity exist? Ituran stock has to be beaten down for a reason.
- Ill-timed Road Track acquisition
- The company acquired Road Track in 2018, which was going to provide them with several benefits. For one, it would expand their relationships with OEMs, whereas Ituran mainly played in the aftermarket space
- Unfortunately, Brazil was ravaged by the COVID induced recession. At one point, Brazil car registrations were down 99.9% during COVID
- The second impact was that OEMs wanted to save money. Typically OEMs provide a six-month free trial of the Ituran product, which led to pretty good conversion rate. Then the OEM cut the free trial to three months and then one month, which hurt subscriber conversion.
- All things considered, the amount of OEM contracts lost is pretty encouraging. The losses look to be leveling out as well. This is probably boosted by the low churn rate (3% mentioned previously) in normal times.
- Hopefully this recovers, but another good signal is that aftermarket subscribers, which is higher margin business, continues to grow
- Road Track wasn’t all bad. They do still have better access to other Latin American countries mentioned previously and from the latest calls, it seems like the company will be leaning into those areas to grow.
- FX Headwinds Cloud Earnings Strength:
- Most of the company’s earnings are in currencies that have fluctuated a lot
- This includes the Israeli shekel, Brazilian real and to a degree, the argentine peso.
- When you look at results, particularly 2015/2016 time frame when the Latin American currencies depreciated a lot, the results can seem more lumpy than reality
- Doesn’t GM’s Onstar do this?
- They do, but also much more expensive paid subscription at $350/year (around 3.5x the cost).
- It uses GPS, which Ituran also uses in its growth areas, but again the core for Ituran is RF network
- Ituran is actually the provider to GM in Brazil, which they originally signed in 2012.
- Are there any comps to help us understand the value in Ituran stock ?
- Lojack is actually public via a subsidiary of CalAmp (ticker: CAMP). They’re also a small cap, expected to do about $340MM of revenue in FY2020 and just $30MM of EBITDA (i.e. Ituron is much more profitable). They trade at ~18x ’20 EBITDA and 11.5x FY2022 EBITDA. They also have more debt.
- Pointer was an Israel-based company that was also small, but was public and was acquired by a company called I.D. Systems for ~10x EBITDA in 2018
- TomTom isn’t a great comp, has been shrinking and will be just slightly EBITDA positive in 2020 (though COVID had an impact). It has about 2x Ituran’s sales, but trades at 1.8x 2020 sales and 1.6x 2021 sales. This is where Ituran trades, but Ituran is expected to grow, is profitable, and generates good FCF.
- Is Management aligned with Shareholders?
- I follow another Israel-based company and I will say they tend to be very conservative.
- For example, I think Ituran should probably carry a bit more debt, but perhaps the culture there frowns upon that. And Ituran’s management seems proud to be back in a “net cash position.”
- Fortunately, for the Road Track acquisition, they did not issue Ituran stock to fund the deal
- Management owns ~23.5% of Ituran stock via a holding company “Moked Ituran Ltd”. Moked literally means “focus” in Hebrew, so hopefully that’s a good sign
- I follow another Israel-based company and I will say they tend to be very conservative.
Bottom line: I think expectations for Ituran stock are pretty low. I also think it’s a cash cow with a highly recurring business model. I’ll admit, my biggest concerns are about technology disruption, but that’s true for a lot of businesses I own as well. That also probably stems from their brand not being known well in the US, where I am located.
I think Ituran’s results will improve over the year, which may mean it gets more attention and Ituran stock can re-rate. They also have enough cash to cause a re-rating themselves (i.e. buybacks) which is always positive.