Spring Sale
To state the obvious, investing in Avigilon Corp (TSX: AVO) is not for the weak of heart. The stock has been extremely volatile in the last year, and investors in the stock should be prepared for this volatility to continue. From its lows of $14.00 in October of 2014, the stock had rallied 80% to close at $25.36 on March 2, 2015, which was right before the company released its fourth-quarter 2014 results. Upon the release, the roller coaster ride continued and the stock took a massive dive to close at $19.45 as of March 10, or down 23% in about a week.
Volatility equals opportunity
So, to answer the question on how to profit from the volatility, investors first need to determine if this latest hit to the stock price is justified. Has the investment case deteriorated and has something changed? Let’s walk through the latest developments to answer these questions.
The issue surrounding Avigilon this quarter and in quarters before is not about disappointing growth, but about the spending needed in order to achieve this growth. However, to be fair, with a fourth-quarter 2014 gross margin of 57.5%, an adjusted EBITDA margin of 21.7%, and an adjusted net margin of 14%, it looks like the company has done a great job in walking the fine line between growth and margins.
At this time, the stock is trading at 19 times 2015 consensus EPS estimates, and 14.8 times 2016 consensus estimates, with an expected EPS growth rate of 28% in 2015 and 2016. It looks like the current weakness has created a very attractive opportunity. Let’s dig deeper.
Short-term pain for long-term gain
So, of concern in the fourth quarter was margin erosion as the company continues to invest in growth. General and administrative expense increased significantly in the fourth quarter of 2014 versus the fourth quarter of 2013, to 12.3% of revenue versus 9.3% of revenue, as the company continued to increase spending to support infrastructure and personnel additions. In the short term, these expenses will continue to increase in order to capture market share and continue to build the business.
And management mentioned on a conference call that EBITDA margins have historically ranged from 15-25%, suggesting that going forward, we may very well see margins trending down to the mid to high teens, with heightened risk for continued volatility. The risk that the market has been reacting to is that spending might be higher for longer than anticipated. Simply put, management’s goal for EBITDA margins of 20-25% in 2016 has been put into question.
Now, let’s look at the revenue growth that the company has achieved this quarter. While foreign exchange had a positive impact on revenue growth, with revenue growth of 42% this quarter and 52% for the year, Avigilon clearly continues to execute on its plan. Revenue in its Asia Pacific segment increased 77%, and although this segment represents only 6% of total revenue, it is a good sign that the company is achieving worldwide success. In the U.S., which accounts for 55% of total revenue, revenue increased 48.4%, while the Europe, Middle East, and Africa (EMEA) segment revenue increased 42%.
Avigilon is investing for the long term. The company aims to strengthen its position as an end-to end surveillance solutions provider, further its intellectual property portfolio in the video analytics field, and continue to penetrate the access control market. The company continues to successfully position itself in a market that is expected to be $30 billion in the next few years from $18 billion in 2014.
Top notch balance sheet
This review would not be complete without mentioning Avigilon’s balance sheet. The balance sheet is still in good shape, with a cash balance of $73 million or $1.60 per share. This healthy cash position, and the fact that the company has no debt, provides flexibility and safety that is sure to come in handy.
The bottom line is that the investment case for Avigilon has not changed, despite higher spending requirements, to support the company’s long-term growth plans.
