LoJack (UNKNOWN:LOJN.DL) is the leading provider of automobile technology products and services for the tracking and recovery of mobile assets, stolen vehicles, motorcycles, construction equipment, cargo, and people at risk of wandering. The company's stock is trading near 20-year lows and has a tremendous opportunity with a new move into the fleet management space. Soon, current headwinds should converge into tailwinds; this presents a significant opportunity to investors. I believe that LoJack could become a multibagger relatively soon as the company has a very wide moat, is entering the lucrative fleet management industry, and trades at a dirt cheap valuation.
One of the widest moats in automobile technology
LoJack has built a wide moat with a blend of high switching costs and brand power. The firm benefits from several favorable trends, including strong brand equity and awareness. According to a brand study in 2011, LoJack benefited from 81% aided brand recognition, and LoJack's 90% retrieval rate on stolen cars, trucks, and SUVs yields strong brand equity and an incredibly sticky customer base.
Seeing that LoJack benefits from consumers making a large up front investment (such as buying a car), many consumers would gladly purchase one of LoJack's recovery devices to protect their investment. LoJack has also been able to develop a close knit relationship with law enforcement through the years, forming a loyal customer base out of the police force. Through their use of LoJack's equipment, more than 300,000 stolen vehicles have been recovered.
Regardless of operational and macroeconomic trends that have hampered LoJack's progress in recent years, the company's underlying fundamentals are still both sturdy and capable of generating excess returns on invested capital. LoJack has been able to establish itself as a household name associated with safety, recovery, and protection.
Unlike competing GPS services that are visible to thieves and are easy to disable, LoJack has small devices that are easy to conceal. LoJack's devices make use of an isolated radio frequency, making stolen vehicles far easier to find than other traditional methods.
The entrance into the fleet management industry
LoJack's business of marketing recovery products to the average consumer is currently declining at around 6% annually. While growing at around 3% yearly in North American operations, the international Brazilian litigation that LoJack has against it is the face behind the revenue losses. As such, I gladly admit that this kind of growth is not attractive at all, especially given LoJack's small size.
Luckily for investors, this story is about to change.
LoJack is quickly becoming a fleet management company, and I believe that this is where the firm will be able to benefit from major growth trends. Last January, LoJack and TomTom (OTC:TMOAF) entered into a "strategic alliance" to combine TomTom's fleet management and LoJack's vehicle protection services.
TomTom is the world's leading provider of location and navigation products and services, servicing 27,000 customers worldwide and operating in over 330,000 trucks. Not only does TomTom have a broad distribution network, especially in Europe, but it also has a well-established grasp on the fleet management industry in terms of market share. The joint venture will put a LoJack device into every fleet management customer TomTom has while TomTom markets its services through LoJack.
Given both companies' highly effective and integrated distribution networks, LoJack should have no problem gaining market share in the fleet management industry. Fleet management solutions aim to help the traditionally low margin trucking companies increase both productivity and profitability. Since trucking companies make up for their low net profit margins through heavy volume, expanding margins by even several basis points can have a dramatic effect on their profits. There is certainly a strong demand for these solutions, and LoJack seeks to play a role in each case. Research firm MarketsandMarkets estimates that the entire fleet management industry is currently worth $11 billion and will be worth around $30 billion by 2018, growing at acompounded annual growth rate of 23%.
The fleet management industry alone presents tremendous opportunities to LoJack. As a result, management has actively begun taking steps toward developing this segment. This is evidenced by the hiring of telematics expert Emad Isaac for Chief Technology Officer (CTO) last February, the joint venture with TomTom, and the dramatic yet growing increases in capital spending toward the fleet management industry.
LoJack trades at an incredibly low price
Currently, LoJack is valued at around .3 times its EV/R. It trades at a third of sales, and though it may be undervalued, it is certainly justifiable to a certain degree. As mentioned above, the business of simply marketing the LoJack device to the consumer has been a predictable yet slow growth business.
To someone just looking at LoJack, the lack of current profitability is an obvious concern. By peeling back the onion however, one can see that LoJack actually has gross margins around 54%. The main reason that the company is losing money is due to the copyright litigation LoJack currently faces in Brazil. The company has also had to spend over $7 million in non-recurring legal expenditures, equating to nearly 10% of current gross profit.
That being said, the argument for such a cheap valuation in certainly there. It's important to understand that LoJack is being valued for the status of its current business, however, and not that of its highly lucrative fleet management business where there is blatant evidence that corporate governance wants to enter. LoJack's economic moat would actually widen by entering the fleet management industry, as the switching cost aspect of the business would amplify. Once LoJack has employed its technology in a fleet and increases in profitability have been realized, the possibility of disruption from switching to another fleet management solutions provider would likely be greater than the benefits of switching.
Combining this with LoJack's brand power and TomTom's distribution network, I believe that LoJack should conservatively be able to capture 5% of the fleet management market by 2018 (yielding $1.5 billion in revenue.) At LoJack's current valuation, it would have an enterprise value of around $500 million (.05 times $30 billion.) Seeing that LoJack currently has an enterprise value of $50 million, its shares would go up tenfold if it captured this market share. This assumes that LoJack still trades at its current incredibly cheap valuation. Businesses in the fleet management space benefit from excellent visibility and a very predictable revenue stream. As such, the industry average valuation in the industry is 4.5 times EV/R.
Although it could certainly be argued that some businesses in the industry could be overvalued (such as Fleetmatics at 8 times EV/R), we will discount the industry average by 33% in order to reach a more appropriate 3 times EV/R that LoJack should trade at. At this valuation, shares of LoJack would have upside of 100 fold (10 times for valuation increases, and another 10 times for captured market share.)
The great thing about valuation is that the numbers can be manipulated for even the worst case scenarios. LoJack's ability to capture 5% market share is conservative in my mind, since there are other competitors in the fleet management space that currently have strongholds in the industry such as Fleetmatics, CalAmp, and Accenture. I'm also taking into account that other companies such as Garmin, Qualcomm, and others may enter the industry down the road.
Even if LoJack only captures 1% of the 2018 fleet management market share and continues trading at its current valuation, shares would double (.3 times $300 million.)
Foolish final thoughts
After understanding LoJack's business, it becomes apparent that the synergy of the company's dirt cheap valuation, growth prospects in fleet management, and economic moat yields one of the most undervalued companies in the market. LoJack is certainly an example of asymmetrical risk versus reward, and the firm could easily turn out to be a multibagger.