Israel has one of the highest densities of tech startups in the world and is also called the Startup Nation. It has a startup for every 1,400 people in the country. The number of new companies with ground-breaking technology that come out from this tiny nation is just amazing. A major reason for this is the government’s support for startups that relentlessly explore innovations. The country’s high military exposure enabling citizens to continuously come in touch with path-breaking innovations also helps. This is especially true in the world of auto and tech. 

Image by Gerd Altmann from Pixabay

Over the years, several startups that had their grounding in military tech have grown to become leaders in their sectors. Ituran Location & Control (ITRN) is one such company. ITRN was established in 1994 by the Tadiran conglomerate to develop and operate a service for locating stolen vehicles using a technology that was originally developed for military use by Tadiran Telematics. In 1995, the ITRN concept was sold to a group of investors headed by the Sheratzky family.

Today, ITRN is a leader in the emerging mobility technology field, providing value-added location-based services, including a full suite of services for the connected car. Ituran offers stolen vehicle recovery, fleet management as well as mobile asset location, management & control services for vehicles, cargo, and personal security for the retail, insurance industry, and car manufacturers.

Its products and applications are used by customers in over 20 countries. For example, Ituran is the largest OEM telematics provider in Latin America. Ituran is also the founder of the Tel-Aviv-based DRIVE startup incubator to promote the development of smart mobility technology.

The company has had a tough 2020. The auto sector in which it operates shuttered production around the world. Supply chains were disrupted, and the company went through pain. It even suspended its dividend for a couple of quarters. However, now the tide seems to be turning for ITRN.

Good Start to 2021

ITRN reported its numbers for the first quarter of 2021, and the company has continued to grow, handling the impact of the pandemic quite well. Revenue came in at $67.4 million, around the same level as in the corresponding quarter of 2020 and up 6% sequentially;

Net income came in at $8.3 million, up 30% year-over-year, and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) came in at $17.1 million, up 12% from the corresponding quarter in 2020.

Around 68% of revenues were from location-based service subscription fees and 32% were from product revenues. Product revenues were $21.7 million, an increase of 12% compared with that of the first quarter of 2020. Revenues from subscription fees were $45.6 million, a decrease of 7% over the first quarter 2020 revenues.

Increasing product revenues is a good sign for ITRN. It is the gateway to the company’s services for new customers. While subscription fees fell in Q1 due to the impact of the pandemic, new product fees rose, signifying an opportunity to sell subscriptions to new customers.

It generated $9.2 million in quarterly operating cash flow, having a forward dividend yield of 2.57%, which is very good for a company its size. It recorded a 25,000-net increase in aftermarket subscribers. The total subscriber base amounted to 1.79 million as of March 31, 2021. However, OEM subscribers saw a net decrease of 5,000. The company ended the quarter with $70.1M in cash and equivalents and $41.8M in debt.

“Our results demonstrate that Ituran is emerging from this period as a stronger company, with a platform for continued sustainable and profitable growth. We expect the positive trends in our results to continue throughout the year ahead," says Eyal Sheratzky, Co-CEO of Ituran.

Strong Comeback in Key Markets

A large part of the company’s Q1 business came in from Israel and Brazil. Israel had its highest level of new car sales in history, an increase of 18% year-over-year increase. This is a good sign that 2021 has started well in Ituran’s key geographies. The US also delivered strong numbers. The geographic breakdown of revenues in the first quarter was as follows; Israel 52%, Brazil 22%, rest of the world 26%.

Even Brazil, where the pandemic is still prevalent, delivered decent numbers according to the earnings call. However, many countries in South America are still highly impacted by the virus and their economies remain weak. But ITRN is seeing improving trends in Mexico and North America, apart from Brazil.

Even though ITRN has had a large presence in the US for 15 years, the market has delivered low margins. Sheratzky had a very different take on this. He said that the US market is very competitive, and pricing in a competitive landscape results in low margins. Compared to the number of subscribers in the US, market profitability is low, but ITRN has some of the best numbers in the US.

Sheratzky said that the company’s strategy to put profit at a premium, overgrowth paid off during the pandemic. He said, “…because when we are analyzing the market for more than 15 years, we sold it most, if not all of our competitors, which are bigger than us, always lost money, most of them bankrupt and changed ownership during the years. We have always made money.”

He added that ITRN is now putting more resources in marketing and sales because they are pressing home the advantage they gained in the pandemic. The company said it succeeded in increasing its market share and growing its subscriber base in the US.

Q1 saw ITRN’s OEM business focus on harvesting synergies across geographies. The company says this process has gathered steam and should yield results in the coming quarters. Usually, Q2 and Q3 are a little weaker than Q1 and Q4 for ITRN, but it could change this year.

Brazil was weak for ITRN in 2020. The company said that in October 2020, sales were almost zero. Sheratzky believes that the rate of decline in Brazil has started shrinking. He explained that several people in Brazil had lower income now, and those with a second car have either sold it or dropped the idea of buying another vehicle. 

However, as vaccinations improve and people get back to work, the business will pick up. ITRN has seen a similar scenario play out in Israel, Europe, and the US. Brazil has an aggressive push for vaccinations, and ITRN should resume growth soon.

New Business and Growth

Apart from a decent showing in Q1 2021, ITRN announced on March 30 that Ituran Brazil signed a strategic partnership agreement with Tokio Marine Insurance. The agreement includes both the telematics hardware and installation, as well as an ongoing monthly fee component. Ituran will provide operator services and stolen vehicle recovery services.

Tokio Marine Insurance is currently the 4th largest insurance company in the Brazilian auto insurance market, providing services and working with over 33 thousand brokers and advisors in the country.

ITRN has the largest base of monitored vehicles in Brazil. Its advanced AI technology includes big data, routine analysis, business intelligence, and machine learning, enabling better service and recovery and makes its offering highly attractive to insurance companies.

This deal significantly increases ITRN’s addressable market in Brazil. Sheratzky said, “Via this new partnership, we expect to increase our install base by several thousand on annual basis. We see it further cementing our dominance in the Brazilian market and it supports additional future growth for Ituran in this key market.”

In 2017, ITRN entered into a partnership with the Lumax Group in India. Lumax Group is a premium Indian automotive lighting component manufacturer. They teamed up to develop and sell telematics products and services to the Indian automotive industry. The Indian market has over 250 million registered vehicles which present a massive opportunity for growth.

The partnership was making good progress in 2019 before the pandemic. India has been one of the worst-hit countries during the second wave of the pandemic causing immense stress on its medical infrastructure. The country is just getting out of a lockdown imposed by the second wave.

A major positive for the ITRN-Lumax partnership is the introduction of the new Vehicles Scrappage Policy 2021. Under this policy, commercial vehicles older than 15 years and passenger vehicles older than 20 years will have to be mandatorily scrapped if they do not pass the fitness and emission tests. FitrnThis is being done to reduce pollution levels and ensure that newer vehicles that meet global emission standards hit the roads.

Data says “there are ~17 lakh [1.7 million] medium and heavy commercial vehicles (M&HCVs) that are older than 15 years without any valid fitness certificate, 51 [5.1 million] lakh light motor vehicles (LMVs) older than 20 years and 34 [3.4 million] lakh light motor vehicles (LMVs) older than 15 years.” These numbers represent a good opportunity for ITRN in India.

ITRN is a major investor in BRINGG, a SaaS-technology enabled delivery platform service that aims to rapidly improve pickup and delivery speed, capacity, and customer experience. They own 19% of the company that counts the likes of Coca-Cola, Viola, Salesforce, OG Tech, GLP, Next47, Aleph, Pereg, and Cambridge Capital as investors.

BRINGG raised $30 million at a valuation of $225 million in April 2020. The investment is recorded at a book value of $0.7 million on ITRN’s balance sheet.

Analyst Speak

ITRN’s numbers were positive, with revenue beating analyst expectations by 4.2%. It recorded an EPS (earnings per share) of $0.4, above analyst estimates of $0.38. The last four quarters have seen it beat analyst EPS estimates three times.

These numbers are important for investors as they indicate how the company will perform in the future and help them with forecasts for the next quarters/year.

For 2021, analysts have forecast $270.45 million in revenue on the higher side and $264.9 million on the lower side. For 2022, the numbers are $307.1 million and $306.2 million respectively. The EPS for 2021 is forecasted at $1.64 for 2021 and $1.96 for 2022.

In 2020, the company recorded revenue of $245.63 million. The 2021 upper estimate is around 10% higher than 2020 which is pretty decent considering that the economy across the world is expected to regain momentum only in the second half of 2021.

The company's forecasted 2021 revenue of 10% by analysts is higher than its historical growth of around 7% in the last five years. The company seems to be performing in line with analyst estimates, and there is little reason that it won’t meet targets.

The company’s 2022 revenue forecast is even higher at a growth of 13.3%. When you take a slightly longer holding perspective, ITRN seems to have passed the test. From the looks of it, ITRN revenue is expected to grow faster than the broad industry it operates in, and that is good news for current and prospective investors.

Barclays analyst Tavy Rosner in a May 26 report, maintained a buy on ITRN, with a target price of $29. The stock closed on May 27 at $24.13. Analysts have an average target of $27 on the stock. This indicates a potential upside of 20% according to Barclays’ estimate.

When you take a look at the company’s potential, the changes it has been making to grow in a tough sector, and the turnaround that’s round the bend, ITRN is an easy buy for your portfolio.