Sierra Wireless Update Buy

SWIR : NASDAQ : US$17.12
Target: US$20.00

Sierra Wireless, Inc. provides wireless solutions for the mobile computing and machine-to-machine (M2M) markets.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
Investment recommendation

Sierra Wireless announced solid Q3/13 results with sales consistent with our estimates and earnings above our estimates due to solid gross margin and expense controls yielding leverage along with a one-time tax recovery. However, Q4/13 guidance excluding the AnyDATA acquisition was below our expectations due to a weaker European macro impacting the OEM division. Despite these trends, our long-term thesis is unchanged.

We believe Sierra is well positioned to benefit from strong long-term industry growth rates for the M2M market given strong global trends in Sierra’s core automotive, networking, energy, and sales & payment verticals and our belief Sierra’s automotive OEM sales growth will reaccelerate in 2H/14. In addition, we anticipate continued faster growth for Sierra’s higher margin Enterprise Solutions and believe management will soon deploy some of its $190M in cash as they continue to evaluate margin-accretive acquisition targets that could drive additional growth and leverage. We reiterate our BUY rating, but lower our price target to $20 due to the slower near-term growth reflected in our estimates.
Investment highlights
 Sierra Wireless reported Q3/13 revenue of $112.3M and pro forma EPS of $0.11 versus our $113M/$0.06 estimates. Enterprise Solutions sales were $16.4M and OEM Solutions sales were $95.9M versus our $15.1M/ $97.9M estimates. Due to very strong higher-margin Enterprise sales (up 38% Y/Y) versus our estimates that offset slower module sales, non-GAAP gross margin of 33.4% increased 330 bps Y/Y.
 Q4/13 guidance midpoints of $114M in sales and $0.09 pro forma EPS were well below our $121.5M/$0.12 estimates, even when removing $2M in AnyDATA sales that were included in our prior estimates. Management guided to a similar gross margin and operating expense levels to Q3/13 and we anticipate leverage on the modest sales growth.
October 13 we noted “Well positioned for M2M growth trends in 2014/15; AnyDATA acquisition adds new customers and channels”  thus our unchanged long-term thesis.
 With strong Q3 results offsetting Q4 guidance, our 2013 pro forma EPS est. remains $0.20; we lower 2014/15 from $0.72/$1.25 to $0.55/$1.12.

Our $20 price target is based on shares trading at roughly 7x our 2015 EV/EBITDA estimate


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