EMERGING GROWTH STOCKS | Updated: 27-March-14
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SuperCom (SPCB): Speculative but Recent Acquisition That Triples Revs May Get Name Noticed in 2014
Emerging Growth component SuperCom (SPCB), an Israel-based provider of security products, is jumping 15% today following its Q4 earnings report this morning. Since the name is not well known and has no sell side analyst coverage, we wanted to provide some quick color. We caution that it's a speculative name but a recent acquisition that triples its revenue makes SuperCom a name to watch in 2014.


What They Do

In terms of quick background, SuperCom provides security, tracking and identity products using RFID and mobile technology. For example, the co allows customers to identify and track the movement of people and objects in real time in order to detect unauthorized movement of vehicles as well as trace packages and containers. It also monitors access to premises by control personnel and vehicles. Its industry focus includes public safety and healthcare- and animal-related tracking and records management.

The company recently made a big acquisition (funded in part by a recent stock offering) when it acquired the SmartID division of On Track Innovations (OTIV). The deal adds a number of capabilities to SPCB's arsenal, including national ID registries, e-passports, biometric visas, automated fingerprint identification systems, digitized driver's licenses, and electronic voter election systems. The deal is part of SuperCom's larger strategy, commenced in 2012, to expand its activities in the e-ID (electronic ID) market.



Earnings Results

In terms of the Q4 results, first understand that the company is tiny with a market cap around $90 mln. Revenue in Q4 declined 10% YoY to $2.9 mln and they reported a small loss. There was no guidance. For the full year, revenue was basically flat (-1.3%) at $8.8 mln. When you look at those mediocre results, it makes you scratch your head trying to understand why that would move the stock so much. They do not say much in the press release although probably the catalyst for the move is that 2013 EPS increased 19% to $0.70 despite a 13% increase in shares outstanding.

Another thing that's clear is that SPCB has robust margins. Granted, operating margin declined in 2013 to 17.2% vs 22.4% in 2012. However, part of the decline was related to the company "investing substantial resources" in Q4 to acquire and merge the SmartID acquisition which closed in December 2013. For a small company with less than $3 mln in revenue in Q4, a substantial layout of cash will have a big impact on margins. The good news is that SmartID's products tend to have higher gross margins than SPCB's legacy products, so there should be some improvement in 2014.


Conclusion

In sum, we view SPCB as a highly speculative name given its small size and the fact that it only recently moved over from the bulletin boards, so be cautious. However, investors seem pretty excited about the SuperCom/SmartID combination. Consider that SmartID posts about $20 mln in annual revenue while SuperCom posted $8.8 mln in 2013. The combined company should triple SPCB's revenue and be in the $30 mln revenue range in 2014. And with SmartID's products being higher margin, that will have a double positive effect on SuperCom's results this year. Also, SmartID's focus on the e-ID market means more government customers so these are longer term projects with more stable revenue streams.

Our sense is that today's move was less about the Q4 results and more about investors envisioning the potential of the combined company going forward. With the SmartID deal tripling revenue, expect some big headline growth numbers to get the name noticed in 2014, starting when they report Q1 results, the first quarter of the combined company. SuperCom says that the operations of the SmartID division will "significantly contribute" to results starting in Q1.

SPCB has not provided formal guidance. However, in a Globes interview in January, SuperCom's CEO has a goal of reaching annual sales of $250 million within five years (from pro forma $26 mln in 2013), partly through acquisitions. The CEO conceded that this level seems quite ambitious, but they see their potential markets above $10 billion so a 2.5% market share would get them there.

Of note, SPCB will drop out of our rankings on Monday as we require double-digit revenue growth in the most recent quarter but this stock could very well pop back on after they report Q1 results (last year they reported in late June but it could be earlier). On a valuation basis, assuming the combined company posts $30 mln in revenue in 2014, that computes to a price/sales about 3x and a P/E around 10x, even assuming no EPS accretion from the SmartID deal so it's pretty cheap. It's speculative, but clearly a name to keep on the watch list in 2014 as this SmartID acquisition seems to make a good deal of sense.

--Robert Reid, Briefing.com