The fast lane for Iteris?

Benj Gallander and Ben Stadelmann
Thursday, March 18, 2010

Since we started our second portfolio, the Vice-President’s Portfolio, towards the end of January, it has been an interesting lesson for one of us about the changing nature of technology and time. Multiple times a day — read “too often” — he has checked to see how the VPP is doing. In the old days — say, prior to the mid-nineties — this was impossible to do easily from the comforts of home.

Checking with an overzealous regularity makes the dollar value of the portfolio seem to rest at a virtual standstill, when that is not its nature at all. Picture a stock that is priced at $5 at the beginning of the year. Let’s say it only moves up by about 2.5 pennies a day — hardly something that seems exciting. Yet at the end of the year, that would be a huge gain — better than 100 percent in fact. Looking too often at a portfolio is dangerous, as the tendency is to trade more, which, by and large, that depresses results. Quite simply, less can easily be more.

However, in some areas, there is no question that it is better to have things move quickly. That is the reason for the existence of one of our favourite picks, Iteris, a traffic management company that just happens to be in both the President’s Portfolio and the VPP.

People love to complain about traffic congestion, and there is no question that as urban populations increase, so does overcrowding on the roads. Governments looking to stimulate the economy are willing to throw money in the direction of companies like ITI to have cars complete their journeys more swiftly. This will help to stimulate corporate revenues — even more so as the company unveils new products like its VersiCam Wireless and VantageView. Recent contracts have been signed with locales as diverse as Los Angeles and Abu Dhabi.

During these difficult economic times, the company has performed admirably. While quarterly revenues declined 16.1 percent year over year to $14.6 million, the bottom line remained black. Even the squeezing of gross margin to 38.1 percent from 44.4 was not enough for the red ink to flow.

And things are looking better. The balance sheet is spiffy, with total debt slightly north of $7 million. This is almost matched by the cash on hand of $6 million, near the highest level in years. The corporation trades near its book value of $1.62. Cash flow from operating activities is positive. Insiders were buyers last year, especially near the bottom in February and in August. Last month, three of them scooped up shares in quantity, increasing their ownership level to better than 20 percent.

Recently, the company adopted a shareholder rights plan. While the primary purpose of the move is indeed to ward off unwanted suitors, management stated that it was not in response to a takeover threat. Apparently they feel that the company is undervalued, and do not want a predator swooping in to steal the fruits of their labours.

This recently happened to one of Iteris’s major competitors, Quixote, which was on our Stock Watch List. As 2009 was turning into 2010, the company received a takeover from Trinity Industries for $6.38 per share, which was better than a 100 percent premium to its trading price — a very sweet deal indeed for shareholders.

While it is virtually impossible to imagine this company surging above the $25 level where it was a decade ago, it is quite reasonable to imagine it retracing its footsteps to our $3.49 Initial Sell Target, a price level that it has broached for brief periods over the past five years. That would work out to about a double of its current trading price of around $1.75. It is one of the favourites on our Buy list.