LoJack provides a set of products and services that aid in the
tracking and recovery of stolen vehicles, motorcycles, construction equipment, cargo,
laptops, and people at risk.
The Lojack RF locator system in the United States
uses an FCC-allocated frequency designated for use by state and local law
enforcement agencies for this purpose.
The barriers to entry are these:
In the US and Italian markets (but not in the Canadian
market), an entrant must obtain the cooperation of state and local law enforcement
agencies for implementation of its tracking and recovery system before starting to sell units in that jurisdiction: they must agree to it, they must install it in their
police stations, and they must be trained in it. This is a time- and cost-intensive process,
and Lojack has long ago borne those costs in the 29 States where it currently operates;
and
Units are mostly sold at the dealerships where
consumers buy their cars. The unit needs to be well hidden -- a particular
strength of the Lojack unit is that it can be well hidden without compromising its effectiveness -- and therefore professionally installed. Lojack has longstanding relationships with automobile dealers in its operating
territories, relarionships wherein the dealers essentially act as commissioned sales staff for
the product.
Not the tallest barriers to entry, it must be said, but perhaps high
enough given the small size of the market.
Given the close relationship between car sales, especially
new car sales, and Lojack sales, Lojack’s financial performance is
necessarily cyclical, though not as cyclical as auto sales themselves:
Lojack’s most winning characteristic is its asset-light
business model, so asset-light, in fact, that it operates on negative net
operating assets.
This makes ROIC x IC tricky to calculate, so instead I’ll
capitalize average 10-year economic profit at a 9% discount rate:
The no-growth value is $9, give or take a nickel. Revenue hasn't grown faster than inflation in the last ten years, so this is an appropriate, realistic valuation. It's hard to see how the share price can avoid appreciating up to that level.
A bonus: despite Lojack's lackluster trailing revenue growth rate, there are reasons to suppose that it might grow in the future: the cargo and elderly tracking segments are new and show promise; the auto market, especially in emerging markets, will grow, and auto theft will probably not fall. These options are free.
Disclosure: I don't have a position in Lojack
Update (7/28/2012): I have added some thoughts in the comments section; the reader questions provoking that commentary are particularly worth reading for anyone interested in this stock.
A few comments:
ReplyDeleteAre you not worried by the fact that the North American (or domestic, depending on which year's report you read) division has been loss making since 2008, yet they continue to pour virtually all of their capex into it? Even if car sales recover to 15m from 11/12m pa, it seems unlikely to me that that's the difference between profit and loss. I'd assume it's a more structural issue.
If North America is struggling structurally, it's probably not fair to use 10 year average economic profit (whatever that is), though obviously if just cyclical that's fine.
Also the numerous law suits filed against LoJack probably means the market is placing a pretty hefty discount on their cash (and probably profits) - not sure it's fair to simply include it in EV at face value.
Since you said they can't pass inflation through to the consumer, is it not wise to factor inflation into your discount rate? How did you come to use 9%?
Having said all that, I enjoy reading your blog and have been impressed by your comments on various others. You might like to know that the "methodology" section of your website doesn't seem to be working. Maybe you haven't got anything in there yet, but I'd be very interested to read it.
I think the losses in the North American segment are cyclical: the March quarter usually represents ~22% of annual revenue, and the March Q 2012 North America revenue figures (without the $3m boost via extended warranty sales) annualise to $123m, in between the segment figures for 2009 ($96m) and 2008 ($135m), which is what one would expect.
ReplyDeleteThere is also some reasonable basis for suspecting that, in the North America market, Lojack is more frequently installed in Japanese auto brands and therefore likely underperformed overall auto sales in 2011 as a result of the tsunami.
Still, the increasing trend toward auto manufacturers’ own embedded solutions (OnStar, BMW Assist, etc) is an issue for Lojack’s North American prospects. The proper solution, of course, is for the company to sell itself (or sell exclusive North American rights) to a Japanese OEM. In my view, there is little chance that management will awake to this possibility. More likely is that, at this enterprise value, a private equity firm may do it for them. (I don't have a position in this issue mainly because I have little faith in management's capabilities).
Which raises the second point: the various litigation matters in which the company is involved. In my view, the litigation that could have a material impact on the company’s valuation is the suit filed by Tracker do Brasil. The amount they claim is unrealistically high, and, to my eyes, only the claim regarding the patent expiration seems to have the potential for merit. Lojack has a history of settling suits, and a similar sized dispute with Kington, its Chinese distributor was settled for ~$20m. I should have adjusted the valuation by this amount, thereby reducing the value of the equity to ~$8.
The Methodology page has temporarily fallen victim to my laziness. I’ll put something there soon.
Thanks for the questions and for the positive feedback.
No worries, while this isn't a company I'd invest in personally, it's an interesting one to look at. Will be interesting to see if they manage to turn around North America. Like you, I have little faith in management, so I'm unsure if it can be just chalked up to cyclicality.
ReplyDeleteI'm hopefully going to take a look at Hawaiian Holdings tomorrow, so if you get some more questions it's probably me.
I realize I'm a bit late to the party, but I did have a couple of comments regarding the comments about LoJack.
ReplyDeleteOnStar and BMW Assist may certainly provide a bit of competition. However, OnStar is based on a recurring subscription model that is relatively expensive. Many people choose not to extend this service given the cost. LoJack provides a one-time cost that is capitalized into the cost of the car, at the time of purchase. BMW Assist comes without the recurring subscription, which is a benefit for users, but this assumes you can afford a BMW.
The second important point to consider, with respect to stolen vehicle recovery, is the method of locating the car. OnStar and BMW Assist rely on GPS to locate a car. Have you ever tried to start up your GPS in an underground garage? Or in a tunnel? LoJack relies on radio frequency to pinpoint the location. The radio frequency is still detectable in an underground garage, and somewhat detectable in many tunnels. Also related to this is the ease in which OnStar and BMW Assist can be disabled (or at least the GPS function). In order to disable LoJack, my understanding is that you first have to locate the device (in some instances, there are multiple devices), and locating the device can be challenging.
Obviously the pending arbitration with their Brazilian subsidiary weighs heavily on the stock price, and leads me to heavily discount the value of cash on their balance sheet.
With that said, their relatively new agreement with TomTom to provide telematics services for fleet customers could provide a relatively lucrative recurring stream of income. For the fleet customers, they derive the benefit of a proven stolen vehicle recovery system along with the additional information about fleet usage.