Below is a full original Cliff Note provided to us by MS Microcaps that fully encapsulates why they added it to their index of Tier One Quality microcap stocks.
Themes:
GARP – Leading Technology – Industry Trends – High Probability Roll Up Strategy
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Data
- Founded: 1984
- Website: www.autoscope.com / www.imagesensing.com
- Exchange: OTC
- Price: $7.13
- Shares Outstanding: 5.4M
- Market Cap: $38.5M
- TTM Revenue: $14.3M
- LT Debt: $1.5M
- Current Portion of LT Debt: $0.06M
- Cash: $3.3M + $9.2M of liquid securities.
- P/E trailing 12 months: 10.2x
- P/E 2024 est: NA, but if licensing revenue becomes predictable, annual run-rate EPS is over $0.80, equating to a P/E of 9x
- EV/S trailing 12 months: 1.9x
- EV/S on 2024 revenue est: NA, but if licensing revenue becomes predictable, the annual run-rate is over $12M, equating to an EV/S of 2.3x
- Annual Dividend: $0.50 or 6.9%
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What They Do:
Through their subsidiary, Image Sensing Systems, AATC sells a suite of products and services to video, monitor, and provide data around traffic activity at intersections in real-time to reduce congestion, allow for traffic/light management decisions, understand driver/pedestrian behavior, and improve safety. Smart Video cameras, detection equipment, and sensors are sold as part of the company’s flagship Autoscope product. Autoscope also works with other major camera and detection equipment brands. In these cases, it appears a customer would only buy the sensors. Around the core video and detection services, the company also provides data analytics services on information that is being collected for real-time analysis and archived analysis.
The company sells autoscope products in the United States, Mexico, Canada, and the Caribbean Through an exclusive distributor relationship with Econolite (a leading industry distributor). This revenue is defined as licensing revenue in the company’s financial statements.
Everywhere else, Autoscope video products are marketed through a combination of distribution and direct sales channels through its office in Spain. Customers primarily include governmental agencies and municipalities. This revenue is labeled as product revenue.
Currently, licensing revenue makes up nearly 100% of the company’s total revenue.
Industries served: The segment of the traffic safety industry the company participates in is ITS, or intelligent traffic systems. The company only deals with over-the-ground systems. For example, some solutions can be buried in the pavement.
ITS applications include traffic signal control, tolling, and variable messaging signs.
In the company’s words:
Transportation leaders around the world deserve accurate and reliable traffic data to make decisions that benefit their entire community. Image Sensing Systems is empowering these leaders by helping them make their cities safer and more efficient by providing technology that gives them meaningful, actionable data to optimize the flow of traffic on their roadways.
Some History:
AATC used to trade under the symbol ISNS. It appears revenue has always consisted of licensing and product revenue. However, the growth in revenue has been quite dismal, with the company having a harder time gaining traction from its product revenue. Total revenue has been stuck in a range of $12M to $15M since 2015. Over the last three years, the company began to restructure its operations and has sold/stopped offering products that were not related to the video/vision product lines or not convenient to help the company scale. For example, the company recently divested its radar detection division (RTMS) and shuttered a data analytics platform (IntellitraffiQ), which we think is due to it not being cloud-based.
Another major move the company made in 2021 was to structure the company into a holding company to focus more on making acquisitions to grow within and outside its core market.
“Autoscope creates value through owning and supporting operating subsidiaries and investments, anchored by core investments in the fields of technology and engineering. Autoscope’s main subsidiary is ISNS.”
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Reasons To Add To Index:
- The company has launched new products that management claims are helping the company win back the market share that it had lost. This culminated in the company launching a new version of Autoscope in May 2023. It appears that the company is now thinking of its product offering as more of a platform with more powerful software data analytics insights. Part of the impetus for the new approach was in response to customers asking the company to provide more feedback on understanding driver behavior.
- After losing momentum during COVID, industry growth momentum is back on track.
- Favorable Industry Trends: Legislative tailwinds arrived in 2022 when the U.S. government started budgeting to fund more studies on how to prevent roadway fatalities: “human factors research” studies. The motivation for this was due to facts showing that there were little improvements in fatality stats between 2010 and 2020 and that traffic fatalities actually rose 18% in 2021. The government also launched the Road to Zero initiative to eliminate traffic fatalities by 2050. Globally, the road safety market size, at about $3.07 billion in 2022, is anticipated to grow at a compound annual growth rate (CAGR) of 17.5% from 2023 to 2030. Furthermore, the ITS market that the company participates in is expected to grow 8.5% to $50 billion.
- Staying with the industry theme, 60% of the market is still using old, inferior technology called in-pavement loop detectors. Provides great opportunity for high-tech solutions to take market share. “The detector powers the loop, causing a magnetic field around the wire. The loop then tunes to a resonate frequency, and the detector constantly monitors the frequency for changes. When a vehicle enters the loop, the frequency increases, causing the detector to send an output to the gate operator.”
- Infrastructure Bill: The $1.2 trillion infrastructure bill passed in 2021 will start to release funds more aggressively. Over $200 billion is allocated to the transportation industry, with $11 billion in transportation safety programs, including a new program to help states and localities reduce crashes and fatalities, particularly among cyclists and pedestrians.
- With more than 140,000 installations in over 70 countries AATC seems to be a clear leader in its industry. It claims to have “pioneered video image processing, also known as machine vision, for vehicle detection.”
- Strong Distribution Partner allows for increased market penetration in a strengthening industry. “Autoscope video products are marketed in the United States, Mexico, Canada, and the Caribbean through exclusive agreements with Econolite Control Products, Inc. (“Econolite”), which we believe is the leading distributor of ITS intersection control products in these markets.”
- The acquisition strategy, outlined in the company’s 2022 annual shareholder meeting, makes sense and reminds us of Constellations Software’s 13,000% multi-bagger journey (CSU.TO CNSWF). While management has stated that it wants to execute a roll-up strategy, it will initially focus on acquiring competing companies or specific products from competing companies that can fit well into the company’s leading distribution network. Additionally, the software platform could be expanded to more than just traffic. For example, trucking rail, maritime, and the military offer areas of expansion. Constellations Software is a tech company that is a serial acquirer of high-quality, profitable businesses focused on Vertical Market Software. This created real and long-term synergies as the management was building the company with a 10+ year outlook.
- As an example of how the company could grow, management mentioned that they could install their sensors in devices already in the market.
- Clearly, it has an AI/Machine Learning angle.
- Get dividends while you wait: The company pays a nice quarterly dividend that’s currently yielding about 7% and also just paid a large special dividend, which shows it’s going to reward shareholders while they wait for growth to arrive.
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Valuation:
This is where it gets a little tricky. The company has had a history of lackluster and inconsistent revenue growth coming from its distribution relationship, where most of the company’s revenue is generated. At the same time, the company hasn’t demonstrated an ability to grow its non-distributor revenue consistently.
Revenues have ranged between $12m and $14m since 2016. However, industry dynamics have improved which could mean that their distributor will have more success selling the company’s solutions, especially now that it has more products to sell. Furthermore, the company’s acquisition strategy should eventually allow the company to generate more revenue streams. This could be an interesting set-up where the stock goes from a low valuation to a very high valuation situation. In the meantime, we’ll have to accept some lumpiness in revenue, but at least we are getting dividends to wait for a growth inflection catalyst. Still, assuming the company can maintain its current quarterly revenue level of about $3M to $4M, annual earnings per share would exceed $0.80. The current meager price-earning ratio of 9x seems worth the risk.
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Caveats:
- Seasonality (Q1 slowest due to less road work in the winter).
- Rollup strategies can carry low valuations, especially if starts making acquisitions outside the traffic safety industry
- High industry growth rates means more competition
- Lumpy product revenue can get low valuations
- Majority of revenue comes from a distributor relationship as opposed to direct sales. This is great in terms of gross margins and reducing marking expenses, but obviously offers some risk because of the sales concentration.
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Research Tasks
- Need to understand the competition
- Why was the company not getting much traction from its IQ data analytics platform when it ran it?
- Why essentially no recurring revenue? One would think that the data analytics side of the business could have a recurring revenue element to it.
- Can the data collected using Autoscope sensors be used with data analytic platforms other than its own?
- Very curious why the company is only producing about $12 million in revenue a year when it claims to be a leader.
- Is the industry very fragmented, with lots of smaller players?
- How does management support the following claim: “We believe ISNS’s solutions are technically superior to those of our competitors because they have a higher level of accuracy, limit the occurrence of false detection, are generally easier to install with lower costs of ownership, work effectively in a multitude of light and weather conditions, and provide end users the ability to manage inputs from a variety of sensors for a number of tasks. It is our view that the technical advantages of ISNS’s products make our solutions well suited for use in ITS markets.”
- Why hasn’t the company also entered into a relationship with its distributor to market throughout the entire globe?
- What accounted for the company achieving revenue of $18M to $26M between 2009 and 2014, well outside the historical range of $12M to $15M?
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PR/CC/Filings/Presentations Commentary
May 2023 Press Release:
The new Autoscope platform goes beyond just detection and revolutionizes how vehicles and vulnerable roadway users interact with each other and the roadway infrastructure. This platform offers the most advanced detection algorithms with Artificial Intelligence (AI) and machine learning on the market today. It allows transportation professionals to unlock enhanced traffic data, providing a new level of clarity in understanding why certain incidents happen.
Q3 2023 Press Release:
The successful sale of the RTMS business to Sensys Networks will allow us to expand our investment in video-based detection capabilities,” said Frank Hallowell, Interim CEO of Autoscope Technologies Corporation. “We are now focused on helping customers improve safety and efficiency by leveraging our video-based sensing technologies and driving growth and diversification,” concluded Mr. Hallowell.
The global road safety market size was evaluated at USD 3.07 billion in 2022 and is anticipated to grow at a compound annual growth rate (CAGR) of 17.5% from 2023 to 2030. The market is gaining momentum owing to a surge in the number of road accidents and fatalities. The increasing need for public security and improvement in road infrastructure bodes well for market growth. Additionally, several governments around the world are taking steps to decrease traffic accidents through numerous programs and initiatives. In an attempt to curb the growing number of road accidents and fatalities, governments worldwide are focusing on maintaining traffic discipline and ensuring commuters’ safety.
Favorable initiatives supporting the deployment of road safety measures, including rules and regulations and devices to track traffic, will go a long way in favoring growth over the forecast period. For instance, the U.S. federal government launched the Road to Zero initiative to eliminate traffic fatalities by 2050. The initiative was launched by the National Safety Council and encourages the use of safe and advanced services to put an end to traffic fatalities.
The global Intelligent Transportation System market size was valued at USD 51.16 billion in 2023 and is expected to grow at a significant CAGR of 8.5% from 2023 to 2030. Growing demand for traffic control solutions & smart vehicles, the improved safety and monitoring offered by License Plate Recognition (LPRs), modern cameras, and the emergence of smart cities, are contributing to the growth. Intelligent Transportation System (ITS) provides traffic management solutions that enable enhanced road safety, traffic flow, and mobility, creating a positive market outlook. The COVID-19 pandemic hampered the implementation projects and new ITS sales & installations in 2020. However, the ITS market witnessed significant growth from mid-2021 owing to increasing investment by various countries’ governments in infrastructure development activities to recover the pandemic-affected economy.
For ITS setup, which includes Traffic Management Center (TMC), can deal with real-time data and assist vehicles in finding alternate ways to reduce traffic congestion. This system also guides planes and boats for better route optimizations especially amid some natural disasters such as thunderstorm, floods, and heavy rain. This TMC implementation includes a set of video surveillance systems, sensors, weather detection system, vehicle probes, navigation systems, and other systems & components. The data collected through devices is analyzed, processed, and communicated to the user through dynamic signboards, the internet, or mobile telephony. Integration of intelligent vehicles and ITS enables dynamic traffic signal control. Taking into account information from connected cars, signals can be adapted to the current traffic situation in real time. This helps optimize signal times and improve traffic flow. Advancements in sensing and telecommunications technologies are particularly expected to encourage the adoption of the ITS over the forecast period. However, the growing preference for digitization of various attributes for implementing intelligent transport system (ITS) solutions is one of the major factors for the ITS market’s growth.
Reference Links
MS Microcaps Disclosure: We may hold a position in the stock. This article does not constitute investment advice. We are not registered investment advisers. Investing in microcaps carries specific risks best discussed with an investment advisor. Always do your own due diligence.
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