Subscriptions, SaaS, And Decisive Global Alliances Propel Growth

Key Takeaways

• Geographic expansion and new product introductions like vehicle sharing SaaS are set to enhance revenue streams and improve product mix.
  
• Strategic partnerships with high-profile companies and expansion into the OEM sector aim to broaden market reach and bolster profitability.
  
• Exposure to currency fluctuations, reliance on hardware sales, and new product initiatives pose risks to revenue stability, growth, and net income for Ituran Location and Control.

Catalysts

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

• Ongoing geographic expansion and entry into new markets are expected to drive growth in subscriber numbers, leading to increased revenue streams. Increased subscriber numbers directly contribute to higher recurring revenue from subscription fees.
  
• Introduction of new products and services, such as the all-in-one vehicle sharing SaaS technology and motorcycle telematics, is anticipated to open up additional revenue channels and improve the product mix, potentially enhancing both revenues and net margins.
  
• Strategic collaborations with major companies like Porsche and Microsoft highlight Ituran's technology leadership and could lead to higher demand for Ituran's products and services in both existing and new markets, positively impacting revenue growth and market share expansion.
  
• Solid traction in the vehicle fleet management space, with services aimed at car rental and leasing companies, as well as corporate fleets, indicates a growing demand that is expected to increase Ituran's subscription base and boost revenue.
  
• The company's focus on expanding services to OEMs in addition to current finance customer expansions, such as the landmark agreement with Santander Bank, aims at broadening the customer base and increasing penetration in existing markets, which could lead to higher revenues and improved economies of scale, thereby enhancing profitability.

Assumptions

• Analysts are assuming Ituran Location and Control's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.4% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $60.1 million (and earnings per share of $2.98) by about October 2027, up from $50.7 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 14.1x on those 2027 earnings, up from 10.4x today. This future PE is lower than the current PE for the US Communications industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Risks

• Exposure to currency fluctuations, particularly in emerging markets, could negatively impact reported revenue and profits when converted back to U.S. dollars, affecting net income.
  
• Reliance on hardware sales through a subsidiary for a significant portion of product revenue introduces volatility due to inventory decisions by distributors, potentially impacting revenue stability.
  
• Integration of hardware into subscription services in over 50% of geographies abstracts direct sales figures in the P&L, complicating revenue assessment from hardware, which may affect understanding of revenue streams.
  
• Potential market saturation or competition in the telematics and vehicle services sector could slow subscriber growth rates, affecting future revenue and EBITDA targets.
  
• Specific focus on new product initiatives, like motorcycle telematics, carries execution risk in terms of market acceptance and OEM partnership success, which could influence revenue growth and margin expansions.

Valuation

• The analysts have a consensus price target of $36.1 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 $416.4 million, earnings will come to $60.1 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of $26.53, the analyst's price target of $36.1 is 26.5% 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.