Laughing Water Is Crazy About Iteris Inc (NASDAQ: ITI)

Laughing Water Capital is bullish on Iteris Inc (NASDAQ: ITI), a California company is engaged in providing information solutions for the transportation and agriculture industries. The stock has been performing well for the hedge fund, ending the year with a 75% gain since initiation. In its Q4 investor letter, the fund’s founder and managing partner Matthew Sweeney presented his thoughts on the company. Let’s take a look at his comments.

Iteris is our traffic management business. We have owned the stock for 3 years now, and it has been a bumpy ride. We ended the year with a ~75% gain since initiation, but the stock was down nearly 50% on the year. Most of the damage was done in Q1, and I detailed the temporary problems that the company is facing in our Q1’18 letter. The most notable issue that the stock has faced is that the largest shareholder died, and his estate has been selling shares. This is of course frustrating, but it clearly has no effect on the quality of the business.

Simply stated, when a top 5 position is down 50%, it is going to put a dent in the portfolio. However, while the stock traded down substantially, my view of the intrinsic value of the core transportation businesses has increased, and while this downdraft is a drag on our results in the near term, I have added significantly to the position. It is difficult to put this business into a box as it has elements similar to consulting, government business process outsourcing, and asset light project management, but each of these types of businesses typically trade at high teens to lows 20s cash flow multiples. However, cash flow here is temporarily obscured as management has made the difficult decision to invest for the future, which should be bright. The company is now at a point where their existing operating structure can be leveraged through future growth, and the rolling off of the one-time items that the company faced in 2018 combined with the increasingly software centric nature of the business should set the stage for a rebound in the stock in 2019 and beyond.

Additionally, recent transactions among peer companies suggest that Iteris is worth multiples of its current price as the strategic value of intelligent traffic systems becomes apparent in the context of the future of smart cities. Lastly, Iteris is still investing in a venture stage agriculture business (“Ag”) that obscures the value of the traffic business in the GAAP financials. If management is able to execute on their plans for Ag, this business alone could be worth more than the current market cap looking out a few years.

Freeway/Credit: Pixabay

Iteris Inc (NASDAQ: ITI) provides applied informatics for transportation and agriculture. The company collects, aggregates and analyzes data on traffic, roads, weather, water, soil and crops to generate precise informatics for safer transportation and smarter farming. It provides services to municipalities, government agencies, crop science companies, farmers and agronomists.

Shares of the company are up over 12% since the start of this year. The share price has dropped more than 26% over the past 12 months. Now trading at around at $4.10, the stock has a consensus average target price of $7.60 and the consensus average recommendation of ‘BUY’ from analysts polled by FactSet.

Among hedge funds tracked by Insider Monkey, only six funds held bullish positions in Iteris Inc (NASDAQ: ITI) at the end of the third quarter of 2018, including Ardsley Partners, Trellus Management Company, and Royce & Associates.