Old School Value

Hi

I am quite new trying to analize value stocks. By the moment I am watching mostly the crude numbers of the companies, I can see ITI has some good fundamentals. However they have been increasing oustanding shares consistently year to year, I believe it's harder for this stock to have a big run if value investor's accumulated shares are been diluted. 

I wonder how much weigth you place to this fact when deciding an investment? 

From the 2008 10-K:

At March 31, 2008, goodwill was comprised of $18.0 million associated with the October 2004 merger of the Iteris Subsidiary (Note 1); $9.6 million associated with the acquisitions of the Rockwell International Transportation Systems Group, Meyer Mohaddes Associates and the Viggen Systems Consulting Group; and $200,000 associated with the purchase of the assets of 
Mil-Lektron, a complementary product to the Company’s Vantage video detection business.

It looks like the majority of goodwill is when the company merged its subsidiary into the business.  From there, the company had a tough year, but that seemed to be the tipping point for the turnaround.

Jim,

I'm curious about your valuation method?  Do you use primarily a liquidation value calculation?

I use a combination of DCF, Graham, and EPV.  Overall, I put much more weight into DCF & EPV.  From an earnings or cashflow standpoint, goodwill doesn't come into play at all right?

Aside from the risk of the company having to write down the goodwill and negatively affecting earnings (although it is a non-cash charge), what other factors generally come into play?

Hi All

thanks for the excellent analysis on ITI, DrSues02.

I noticed ITI on my value screen in 11/09. Please see the post on 11/19/09 on this forum. Some members were concerned about the large amount goodwill/intangible on the balance sheet at times.

is there a rule of thumb that the amount of goodwill/intangible on the balance sheet will deter you from buying a stock?

kai fann

This has nothing to do with the stock. I was just wondering how you added the valuation picture. In my future posts I would like to use this to show my valuations instead of manually entering in the stats. It just looks ugly,haha.

Thanks

Post edited 7:50 pm – March 22, 2010 by DrSues02

ITI – Iteris, Inc

Company Overview: We are a leader in the traffic management market focused on the development and application of advanced technologies that reduce traffic congestion and improve the safety of surface transportation systems infrastructure. As an added benefit, our products and services minimize the environmental impact of traffic congestion. By combining outdoor image processing, traffic engineering and information technology, we offer a broad range of Intelligent Transportation Systems (“ITS”) and driver safety solutions to customers worldwide.

Ask anyone who has a long commute to work or lives in Southern California or Atlanta: traffic congestion is a huge problem within the US. Traffic congestion costs a bunch of time & money, not to mention a huge amount of stress and overall headaches. In addition, traffic is a big contributor to greenhouse gases and overall environmental impact.

The leading cause of roadway fatalities are rear-end, lane changes, and roadway departure accidents. From the company’s 10-K: According to the National Highway Traffic Safety Administration, these three crash types result in about 27,500 of the U.S.’s 42,000 annual traffic fatalities and contribute to a considerable economic loss due to injuries, property damage, and decreased productivity.

I believe ITI is well-positioned to capitalize on the ‘Intelligent Transportation Systems’ market, a market that will show rapid growth domestically (from government & environmental programs) and internationally (from population increases in the developing world.)

More people = more traffic = more accidents

The Good:

-After several straight losing years in the early part of the 00’s, ITI seemed to turn the corner in 2005. Tangible shareholder equity has increased each year from -14.1 in 2005 to 27.5 in 2009.

-Company has positive FCF for the past 15 quarters. CROIC has steadily improved, with a median average of 39.1% for 2007-2009. ROE median for 2007-2009 is 21.3%

-From their most recent 10-K: At March 31, 2009, we had $40.8 million of federal net operating loss carryforwards and $18.4 million of state net operating loss carryforwards that begin to expire in 2019 and 2013, respectively. Effectively, at its current pace, the company will pay no income tax for the next 10 years.

-3 separate insiders purchased 260k shares in late February at prices ranging from $1.30 to $1.39. The company then proceeded to announce a new $1.1m deal in early March. While I won’t dive into the legalities of these purchases ahead of the good news, insider buying is definitely a great sign.

The Bad:

-The economic downturn is affecting the company in a negative way. Sales are down across all divisions, with the largest drop occurring in the Vehicle Sensor segment (which markets to heavy trucks). Management sees continued softness in this segment for the next few quarters, although it was able to post a sequentially increase in the latest 10-Q – a small bright spot and maybe early signs of a turnaround.

-The company has a ‘poison pill’ included in the articles of incorporation that would make it very difficult to acquire the company, even if an offer was beneficial to shareholders: Under the terms of our certificate of incorporation, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock.

-FCF has decreased from 12.6 in 2008 to 11.0 in 2009. It looks like 2010 will come in slightly lower as well. Although most of my valuation assumptions assume zero growth, management must continue to prove that the losing days are behind them and they can effectively grow the business and cash flow.

Valuation:

Conclusion:

I like the growth potential in the traffic management industry and believe ITI is in a great position to capitalize once the economy rebounds. Most of our transportation infrastructure and traffic patterns were designed decades ago. With heavy insider buying, potential for growth (both internally and externally via new products & international expansion respectively), I believe ITI is attractive buy under $1.50.

Final words straight from ITI: We believe that the need to rebuild and modernize aging transportation infrastructure will continue, and in addition to funds available through the stimulus package and federal highway bills, there exist a variety of other funding mechanisms that support transportation infrastructure and related projects…

P.S. Just yesterday, the stock jumped 20% on heavy volume. I’m eager to hear the latest news…

*Long ITI