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.
