Sierra Wireless Inc Valuation – Initial Coverage $TSE:SW

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Sierra Wireless Inc (TSE:SW) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Sierra Wireless, Inc. offers second generation (2G), third generation (3G) and fourth generation (4G) cellular embedded wireless modules and gateways. The Company offers products to original equipment manufacturers (OEMs) and enterprises. It operates through three segments: OEM Solutions, Enterprise Solutions, and Cloud and Connectivity Services. The OEM Solutions segment includes cellular embedded modules, software and tools for OEM customers. The Enterprise Solutions segment includes gateways and management tools and applications that enable cellular connectivity for mobile, industrial and enterprise customers. The Cloud and Connectivity Services segment comprises three areas of operation: its cloud services business; its connectivity services, and its managed wireless broadband services business. The Company’s products and solutions include Legato, Project MangOH, AirLink, AirLink Raven RV50, IoT Acceleration Platform and AirVantage Management Service.

SW Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-SW – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,186,497,752 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.70 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 158.68% Pass
6. Moderate PEmg Ratio PEmg < 20 65.62 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.48 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.70 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $0.56
MG Growth Estimate 1.21%
MG Value $6.16
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $8.18
MG Value based on 0% Growth $4.80
Market Implied Growth Rate 28.56%
Current Price $37.02
% of Intrinsic Value 601.32%

Sierra Wireless, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.52 in 2013 to an estimated $0.56 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 28.56% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Sierra Wireless, Inc. revealed the company was trading above its Graham Number of $19.44. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 65.62, which was below the industry average of 68.5, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $3.18.

Sierra Wireless, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $3.18
Graham Number $19.44
PEmg 65.62
Current Ratio 1.70
PB Ratio 2.48
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0


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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $392,174,000
Total Current Liabilities $230,443,000
Long-Term Debt $0
Total Assets $771,587,000
Intangible Assets $305,425,000
Total Liabilities $289,282,000
Shares Outstanding (Diluted Average) 32,367,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.11
Dec2016 $0.64
Dec2015 -$0.11
Dec2014 -$0.61
Dec2013 $1.90
Dec2012 $0.87
Dec2011 -$0.96
Dec2010 -$0.47
Dec2009 -$1.36
Dec2008 $2.47
Dec2007 $1.16
Dec2006 $0.44
Dec2005 -$1.67
Dec2004 $1.17
Dec2003 $0.16
Dec2002 -$3.99
Dec2001 -$2.37
Dec2000 -$0.30
Dec1999 $0.34
Dec1998 $0.15

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.56
Dec2016 $0.37
Dec2015 $0.23
Dec2014 $0.32
Dec2013 $0.52
Dec2012 -$0.08
Dec2011 -$0.31
Dec2010 $0.16
Dec2009 $0.38
Dec2008 $1.07
Dec2007 $0.34
Dec2006 -$0.31
Dec2005 -$0.90
Dec2004 -$0.70
Dec2003 -$1.50
Dec2002 -$1.97
Dec2001 -$0.78

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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