Expanding Into South American Markets Fuels Growth Potential Despite Currency Challenges

Key Takeaways

• Expanding partnerships and subscriber growth in South America and Latin America boost long-term revenue and margin potential.
  
• Strong cash flow and dividend yield improve shareholder returns and market attraction.
  
• Currency fluctuations and small market scale in Chile limit revenue growth, while long sales cycles and emerging markets' risks impact future earnings potential.

Catalysts

Provides location based telematics services and machine-to-machine telematics products.

• The new 5-year contract with Nissan Chile, building on a successful partnership in Mexico, has the potential to bring in tens of thousands of vehicle installations and subscription renewals, positively impacting future revenue and earnings potential.
  
• Active discussions with major OEM car manufacturers to expand into additional countries in South America and broaden services offer significant long-term growth potential, which could drive future revenue growth.
  
• The continued strong subscriber growth, evidenced by a net addition of 40,000 subscribers in the quarter, should translate into increased revenue and improved margins due to operating leverage inherent in the business model.
  
• The introduction and growth of usage-based insurance and telematics services in emerging markets like Latin America, leveraging Ituran's success in Israel, could result in increased revenue streams and potentially higher net margins.
  
• A robust net cash position of $67 million and ongoing positive cash flow support a strong dividend yield, enhancing shareholder returns and potentially boosting the stock's attractiveness in the market.

Ituran Location and Control Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ituran Location and Control's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 17.4% in 3 years time.
• Analysts expect earnings to reach $74.4 million (and earnings per share of $3.72) by about November 2027, up from $51.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2027 earnings, up from 11.4x today. This future PE is lower than the current PE for the US Communications industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Ituran Location and Control Future Earnings Per Share Growth

Risks

• The strengthening of the U.S. dollar has negatively impacted Ituran's local currency denominated results when presented in U.S. dollars, which could continue to affect revenue and profitability if currency fluctuations remain unfavorable.
  
• Subscription fees decreased by 1% year-over-year in U.S. dollar terms, despite an increase in local currencies, indicating potential challenges in maintaining service revenue growth in the face of currency headwinds, possibly affecting net margins.
  
• The market in Chile is smaller than Mexico for the new contract with Nissan, which could limit the potential scale of revenue growth from this partnership compared to their established markets, impacting overall revenue projections.
  
• The long sales cycle for partnerships with OEMs, financing companies, and insurance companies might delay potential new revenue streams, affecting the company's ability to quickly capitalize on market opportunities and potentially impacting future revenue growth.
  
• Emerging markets as a fertile ground for growth may also present socio-economic and political risks, which could lead to volatility in revenue and earnings if these markets face instability or other challenges.

Valuation

• The analysts have a consensus price target of $36.85 for Ituran Location and Control based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $427.1 million, earnings will come to $74.4 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $29.69, the analyst's price target of $36.85 is 19.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.