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Iteris, Inc. Message Board

micromaven7 2 posts  |  Last Activity: Jul 16, 2014 5:37 PM Member since: Jul 16, 2014
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  • Reply to

    A hedge fund's view of today's news

    by micromaven7 Jul 16, 2014 10:25 AM
    micromaven7 micromaven7 Jul 16, 2014 5:37 PM Flag

    Big sigh of relief for shareholders....ITI just issued a press release with preliminary Q4 results. The results are actually a little better than our expectations for Q4 even before this whole audit saga started. It looks like the accounting issues causing the audit delay do not have a material impact on financial results.

    Revenue, net income, cash balances, and total assets are in-line with where they should be. It looks like total liabilities are about $1m higher than suggested by Q3 2014 results. It seems likely the accounting issue was an understatement of ~$1m for "billings in excess of costs and estimated earnings on uncompleted contracts".

    Let's assume liabilities are $1m higher than Mr. Market thought and the additional audit work will cost an extra $1m...that's a $.06 hit to the stock price. We are pleasantly surprised by how small the accounting impact is and we think Sidoti is way off with their $1 price target.

    Our conversations with Iteris suggest the stock will resume trading tomorrow.

  • We own a substantial stake in ITI. While today's news is disappointing, in our opinion it doesn't change the intrinsic value of ITI (which we think is $2.50 per share when the dust settles). A few thoughts on today's news:

    -The accounting misstatement is due to the timing recognition of revenue from contracts. This will likely shift revenue around and change EPS for certain quarters.

    -Our research indicates that this issue should not change the cash flow statement which is the real metric of ITI's value. Last year (already audited) the free cash flow yield for ITI was over 8%. Over the past 6 years, ITI has generated an average of $4.4m in free cash flow. We think this is compelling given the current stock price of $1.65 values the company at only $33m.

    -ITI has had the same auditor (McGladrey) for the past 9 years

    -Abbas Mohaddes (CEO) owns 2.7% of the shares outstanding. We've met Abbas personally and have spent time with him at conferences. The man has a solid reputation in the Southern California business community for integrity.

    -The CFO that was fired yesterday (Chuck McBride) was only at the helm for Q3. Our understanding is that he botched the accounting in Q3 and was on his way to botching Q4. We believe Q2 and prior quarters are all good numbers.

    -ITI has no debt and $20m in cash which means there is effectively no solvency risk for ITI.

    -ITI has real assets, book value is $1.75 per share.

    -We expect the stock to resume trading tomorrow once ITI updates the NYSE on its plan to file current financial statements. We expect another press release from ITI later today or early tomorrow before the mrkt opens.

    Summary: the stock may be weak once the halt is lifted but longer-term we do not see a material impairment to the intrinsic value of ITI. We believe an acquirer will likely make a play for the company if the stock price spends a prolonged time under $1.50. We see fair value at $2.50 per share.

ITI
1.71-0.18(-9.52%)Jul 22 4:00 PMEDT

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