A Current AIM International Equity Holding: Nomad Foods Ltd. (NOMD, $20.71): “NO Getting MAD, This is Rad”

 Nomad Foods Ltd. (NOMD, $20.71): “NO Getting MAD, This is Rad”

By: Katherine Nozel, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Nomad Foods Ltd. (NYSE: NOMD) manufactures and distributes frozen foods, including fish, vegetables, poultry, side dishes, ready meals, and desserts through large grocery retailers and supermarkets. The firm operates under one business segment, yet continues to build a global portfolio, primarily in Western Europe, through their several integrated acquisition brands.

• NOMD’s sources of revenue stem from markets including the United Kingdom (26.9% FY19), Italy (17.7%), Germany (14.3%), France (8.9%), all of which grew organically in Q3. Other European countries generate the remaining 32.3% of revenue. Since Q1 FY18, revenue has increased 8.9% to $1,883MM.

• NOMD expected an adjusted EBITDA between $466MM-$477MM in FY19, and after Q3, confidently narrowed its previous range to a $471MM-$477MM projection.

• Management is satisfied with the performance of FY19 thus far, and expects to heighten long-term shareholder value through NOMD’s strong balance sheet position with over $777MM of cash and 2.8x leverage as of Q3.

• NOMD could be heading to new 52-week highs as management excitedly evaluates several potential acquisition targets that have low risk and high accretion, looking to expand geographic footprint across Europe.

Key points:

Analysts were sensitive towards Nomad Foods Ltd. as Q3 FY19 approached due to recently lumpy trends. However, NOMD exceeded expectations with +2.5% YOY organic sales growth, from the core portfolio for the 11^th consecutive quarter. Sales are forecasted to increase as the newly acquired Green Cuisine, a plant-based brand, plans to expand beyond the United Kingdom in FY20, while enhancing the brand’s quality and taste.

Additionally, NOMD continues to prioritize meaningful cost savings and synergies across all brands; SG&A expenses decreased 80 bps from the prior year. Further, gross margin increased 110 bps to 29.5% as a result of improved pea supplies, operational improvement in the Goodfellas brand, and pricing adjustments to fish prices. According to Wells Fargo Securities, the integration of Aunt Bessie’s and Goodfellas Pizza, two FY18 acquisitions, will trigger an EBITDA margin target of 20% in FY21. NOMD strategically aims for double-digit YOY EBITDA growth with 14% growth last quarter.

NOMD maintains a strong cash flow position in which robust growth opportunities via additional acquisitions will provoke an increased stock price. Management’s tone during a Q3 press release and earnings call suggests an upcoming acquisition. The CEO revealed that he and management are currently evaluating several potential targets to blend into the core business that will not be effected by risks of Brexit. NOMD intends to continue investing heavily in “Must Win Battles,” strengthening core icons to develop distinctive brands within the portfolio.

What has the stock done lately?

Although NOMD dipped to $18.89 in October FY19, prices since, have grown steadily to a current price of $20.71. Although the 52 Week Range of $15.87-$23.06 is slightly volatile, management’s strong grasp on cost savings, alongside future acquisition intentions, will improve stock performance moving forward.

1 Month Stock Price Chart

Source: FactSet

Past Year Performance:

Over the course of FY19, NOMD increased 23.89% YTD, outperforming the market in Q2 and Q3. EPS was $0.13 in Q1, rising to $0.24 in Q2, and slumping back down to $0.20 in Q3. Based on FY19’s performance and recent management’s proposed initiatives, NOMD’s performance will likely exceed expectations in FY20.   

1 Year Price Chart vs. Benchmark

Source: FactSet

My Takeaway

NOMD was pitched and added to the AIM International Fund in January 2018 at a price of $17.15, with a price target of $20.55. NOMD’s current price has surpassed the initial analyst’s price target with a current price of $20.71. In January FY18, the frozen food market in Europe was forecasted to grow at a CAGR of 4%. As demand increases for convenient food options in a similar fashion to FY18, NOMD will continue to dominate market share through their strategic initiatives of geographic expansion and M&A. Over the course of the past year, NOMD has been advantageous to the AIM International Fund and based on future projections, will continue to add value. Therefore, I believe we should buy additional shares of Nomad Foods Ltd. So, NO getting MAD, this is rad! 

 

A Current AIM International Equity Holding: Sberbank (SBRCY, $14.86): “Will Sberbank Continue to Spur New Growth?”

Sberbank (SBRCY, $14.86): “Will Sberbank Continue to Spur New Growth?”

By: Joseph Vitrano, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

• Sberbank Russia (SBRCY) Sberbank is the second largest bank in Russia, it accounts for one third of the Russian Banking system. They have more than 14,000 branches across Russia. The bank and subsidiaries are spread across Russia, the US, UK, and Central and Eastern Europe.
• The bank services both retail and corporate clients through deposits, credit cards, commercial lending, wealth management, and insurance.
• Sberbank is a leader in Russia, and is positioned to continue to grow digitally through retail as well as grow in wealth management in Russia.
• Sberbank has met its targets in 2018 for their 2020 Strategic plan, and continue to stay on target. They continue to have cheaper multiples than comparables and an excellent return on equity of over 20%.
• The central bank of Russia cut the key rate by 50bps to 6.5%, with worrisome factors like slowing inflation and lower GDP growth than expected. The price of Oil in the past 52 weeks ranged from $42 to $66.

Key points: 

Sberbank Russia was originally added to the AIM fund because it was cheap from Russia’s recession in 2015. It left the price of Sberbank at $6.6. The price has appreciated well past the price target of $7.82 in 2015. The original thesis of Connor Connelly AIM Alum is that Sberbank would be able to cut costs and improve efficiency like no other. He was right, and now Sberbank boasts ROE of 23%. They have been improving their mobile app and online banking to successfully acquire new customers and cut costs.

The largest issue facing all banks is worsening interest rates and tighter spreads. The Russian 10-year and 2-year spread tightened to 59 bps. However, this is still better than the US which has a spread of 23 bps. Their central bank just cut the key rate to 6.5% because of worries of deflation. Although GDP growth looks a bit weak, there is hope for better growth in Q3 according to their central bank. A worrisome long-term factor is Russia’s dependency on oil. Oil makes up 30% of their GDP, and a decline in the price of oil would have a major effect on their economy. Sberbank’s predictions indicate the price of crude staying around 55 dollars USD to make their goals. Crude is around $58 a barrel currently. Russia is hoping to lessen their dependency on oil exports and will have to in the long run as larger economies move to sustainable energy.

What has the stock done lately?

Sberbank’s price saw an increase on November 15, due to an acquisition of a 36% stake in MF Technologies. MF Technologies has a 58% stake in Mail.ru. Sberbank wanted to add to their technology portfolio and this is said to be beneficial for the both companies. Sberbank has fallen in price over the past month from $15.05 to 14.86. This fall was due to Gazprom taking the spot at the top of Russia’s Banking sector. Gazprom’s management decided to double their dividend payout, allowing their market cap to climb past Sberbank.

Source: FactSet

Past Year Performance

Sberbank has seen excellent growth over the past year. In fact, Russia as a whole has been an excellent area of growth. The MSCI Russia Index is up 20.8% over the past year. Sberbank is up 29.6% over the past year from $11.47 to $14.86. Sberbank is looking strong, outperforming Russia’s index, and looking to continue to grow.

My Takeaway

It is my recommendation that Sberbank continue to be held in the AIM portfolio. We will have to continue to monitor the economic conditions of Russia. Especially their key rate, yield spread, and oil prices. Although it is tough for the financial sector throughout the world it seems this Russian bank can spur new growth. While Gazprom took the lead as the largest bank, it is tied to the Oil industry. Sberbank being less focused on oil and more focused on technology will help it prevail in the long run.

Source: FactSet

OK, I get it --- time to recognize the new world order of e-commerce and social media. A bold prediction, but I think traditional retail is going to die in the next decade!

The end of the decade allows for reflection on what’s changed

by David Krause, Marquette University's AIM Program Director

In the @MarquetteAIM program over the past five years we’ve been studying technological disruptions and their impact on a variety of industries. We've focused primarily on the amazing breakthroughs in hardware and software. However, probably the greatest changes we’ve witnessed have been in the area of consumer behavior and how e-commerce has transformed how consumers buy products today. 

Recently we studied Kylie Jenner's sale of half of her firm to Cody to see how just much things are changing in the world of retail. And the results were quite shocking..

As was pointed out in recent Wall Street Journal articles and stories in Seeking Alpha – the traditional world of beauty products has been radically altered by social media. For example the once powerful direct seller of cosmetics, Avon Products (NYSE:AVP), is today losing money and has seen its stock price drop from $40 in 2008 to about $5 today. Let’s face it, millennials and Gen Z consumers do not want direct selling agents of beauty products showing up where they live – they want to buy what they need online.

Avon Products

The AIM students examined the recent deal struck between 23 year-old Kylie Jenner (founder or Kylie Cosmetics) and Cody – which had a valuation greater than $1B! In 2010, Kylie was not even a teenager a decade ago and today she is the planet’s youngest self-made billionaire. 

The collapse of direct selling (Avon) and brick-and-mortar stores (JC Penney) has been driven by a fundamental shift in how consumer products are marketed and sold to young adults. Out with the old – Avon Products – and its history dating back to the 1800s of the direct selling of beauty products; and in with the new - Instagram-powered retailers like  Kylie Cosmetics – with less than 20 employees!

In the AIM program in the spring of 2020 we will continue to look at the impact of social media and its power in direct branding and marketing. Understanding the changes taking place – especially with how consumers buy goods and services online today – impacted by high profile influencers with hundreds of millions of social media followers - is essential. 

Maybe investment research needs to move away from the traditional approaches of evaluating existing business models and focus more on the future of retail. Kylie Jenner’s breakthrough in beauty products isn’t likely to be an exception, it might become the new normal. I get it -its time to recognize the new world order. Traditional retail is going to die in the next decade and e-commerce will continue to flourish (especially with 5G just around the corner)!

A Current AIM International Equity Holding: Eaton Corporation Plc (ETN, $91.86): “Power of Eaton”

 Eaton Corporation Plc (ETN, $91.86): “Power of Eaton”

By: Sean O’Leary, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Eaton Corporation plc (NYSE:ETN) is a power management company that is diversified through providing energy-efficient solutions for electrical, hydraulic, and mechanical power. Eaton (ETN) operates in five main business segments: Electrical Products (33% of FY18 Revenues), Electrical Systems & Services (27.9%), Vehicle (16.1%), Hydraulics (12.8%), and Aerospace (8.8%). Eaton does business in over 175 countries, with the Unites States making up 55.7% of total 2018 revenues, Canada making up 4.3%, China making up 4.1%, Germany making up 3.6%, and many other countries making up the rest of revenues.

• Aerospace sector is proving to be a strong segment of profit and growth through all time high margins and 9%-10% growth in Aerospace sales due to high order rates of military fighters, commercial transportation, and commercial & military aftermarkets.

•  Hydraulics revenues were down 10% with an 8% decline in organic revenues and operating margins of 11.9%, down 290 basis points from last year. The organic revenue declines were largely due to weakness in global mobile equipment markets.

• ETN has announced its plan to sell the lighting business to Signify for $1.4 billion, which will improve order growth in other segments and support margin expansion as the lighting industry will be soft in future quarters.

• Management has long term potential to implement an 80/20-type excellence initiative and blend A/R, A/P, finance, sourcing, HR and IT functions from plant and field offices, to integrate shared service centers. Lean is another long-term opportunity in the fact that 10-15% of plants are rated world-class with an unbalanced level of these in legacy Aerospace and Vehicle divisions.

Key points:

ETN has seen strong revenues and increased margins in the past year even when facing many challenges. Revenue and EPS have seen increased growth in the past year, besides in Q3 ($5,314 million) of 2019 when revenues were less than Q3 ($5,412 million) revenues in 2018. This decrease in revenues in Q3 compared to the year before is largely due to working in global economies and less volatility in ETN’s end-markets.

With $4.5 billion plus available cash for 2019-2021, ETN appears to be interested in added acquisitions. ETN’s management has decided to stay disciplined on how they will valuate acquisitions and segments that they will sell. Candidates for acquisition are likely to be focused on product adjacencies and geographic expansion. With the recent announcement of the lighting segment being sold, this shows us that ETN going forward will be moving towards exiting areas of business that have poor margins and negative future outlooks.

In 2018 ETN has segment operating margins of 18.7% which is an all time high and includes records for Electrical Products, Electrical Systems and Services, and for Aerospace. Strong operating margins will continue to improve through creating world-class manufacturing facilities, delivering productivity enhancements, and enhancing portfolio of products and businesses.

ETN has changed it’s expected full year expected organic growth rate from 3% to 1% largely due to reduced global growth, and the cyclical nature of businesses within ETN. We expect future positive organic growth in Electrical Systems and Services and Aerospace, along with decreases in organic growth in the Hydraulics and Vehicles segments.

What has the stock done lately?

As of late, the stock has seen growth through all time high earnings on margins and very strong operating cash flows. In Q3 of 2019 revenue was reported as $5,314 million, which is down from $5,412 million from the year before. The stock has seen some growth haltered through the cyclical nature of products offered and lowering organic growth in the Hydraulics and Vehicles segments. Although we see a lower revenue, EPS was at $1.44 in Q3 of 2019, which is up from $0.95 in Q3 of 2018. Although ETN’s had slightly lower revenue in Q3 of 2019, margins have been higher which increased profits and positively impacted the stock price.

Past Year Performance: 

YTD has increased 33.79% in value in the last year and has continuously beat the benchmark in the past year. The 52-week range was $64.46 – $93.38 with the low occurring in result of challenging global markets.  The stock price was at $68.61 on January 2^nd, 2019 and has seen steady growth throughout the year where it is now currently trading at $93.07.

1 Month Stock Chart from FactSet

Source: FactSet

My Takeaway

ETN was added to the portfolio at the end of 2018 and in the last year the stock has increased 33.79%. We have seen strong growth in operating margins that reached an all-time high in 2018 and is expected to continue to show strong growth through the end of 2019 through solid performances in the electrical and aerospace segments. ETN is positioned for growth through strong cash flows, management’s focus on creating world-class manufacturing plants that provide productivity enhancements and portfolio of products, and ETN leaving the lighting segment of business that was bringing down margins. ETN is facing a decline in expected organic growth in the next year due to the cyclical nature of ETN and may incur reduced global segment growth because of the global market’s uncertainty. I give ETN a hold rating in the fact that there are negative factors to consider, but with the strong growth being seen in 2019 and expected in 2020, ETN has room to grow even more.

1 Month Stock Chart from FactSet

Source: FactSet

A Current AIM Small Cap Equity Holding: World Wrestling Entertainment (NYSE: WWE, $62.26): “Wrestling with Change”

World Wrestling Entertainment (NYSE: WWE, $62.26): “Wrestling with Change”

By: Andrew Hoy, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary:

• World Wrestling Entertainment, Inc. is a communications services company which creates, produces, and sells television and pay-per-view options for live events in both the U.S. and Internationally. Founded by Vince McMahon, the company segments its revenues by Digital Media, Live Events, Consumer Products, and Corporate. Currently, WWE is under the direction of its founder and two co-presidents, Michelle Wilson MBA and George Aldo Barrios MBA.

• Of net revenue, the Digital Media segment comprises 78%, Live Events comprises 12.5%, and Consumer Products comprises 9%.
• Flagship media service WWE Network subscriber base plateau.
• Weak Q3’19 results primarily attributable to increased media rights prices, heavy investment in content creation and activity in the Live Events segment.
• Focus on expanding brand awareness through new product and distribution channel introductions.
•  Contractual nature of digital media revenues provides reliably low sales volatility.

Key points:

Sentiment in the third quarter regarding WWE was muted, as the year revealed increased competition in the digital media space. To stabilize their revenue, management increased the price of core digital media rights, the effect of which has yet to be realized. The company spent heavily on content creation for the Digital Media and Live Events segments, resulting in consolidated revenue, operating income, and net income all shrinking. Though the company managed to beat consensus by a substantial margin, these factors had an impact of over -15% on the stock price.

In order to maintain market share and accelerate growth, the company is focused on expanding its brands’ domestic and international reach. Recently, WWE reached an agreement with USA Network allowing for distribution of its recently created NXT brand. Moreover, Q3 witnessed the debut of their SmackDown brand on Fox. The event managed to reach 3.9M viewers, more than doubling their subscriber base for WWE Network. Management expressed an expectation for this to drive substantial revenue growth in the future. The company is poised for growth internationally pending the completion of a media rights deal in the MENA region. Finalization of this agreement should drive approximately $9M in additional revenue.

When WWE was added to the AIM portfolio in 2017, one key driver was its growth in subscribers to WWE Network. Priced at $10, the analyst noted that in a period of just under two years, subscriptions had risen from 816,000 to 1.5 million, indicating a CAGR of 35.58%. Since 2016, the market for digital media streaming has become saturated and WWE’s market share has been rapidly deteriorating. Q3’19 realized a 9% decrease in subscriber growth and management guidance indicates they expect to lose another 10% in Q4’19.

What has the stock done lately?

Over the last three months, shares of WWE have fallen -13.24% from $71.76. The S&P 500 returned +4.66% over the same period. After setting a 52-week high at $100.46, the stock retreated below its 50D moving average and has remained there. Notably, shares have found support in the last month after posting a 52-week low of $52.69.

Past Year Performance:

WWE (-18%) has significantly underperformed its benchmark (+9.05%) for the year. The sharp decline from $100 was spurred not only by the company missing expectations in Q1’19 but was exacerbated by management lowering guidance for 2020. To reverse the trend and outperform the market again, WWE would need a significant catalyst such as finalization of the anticipated MENA content agreement. 

My Takeaway:

WWE was pitched on February 10, 2017 and added to the AIM Small Cap Equity Fund at a price of $19.63, with a price target of $25.77. The stock more than satisfied expectations as it reached all time highs, and still sits above the target at its current price of $62.26. According to market research, the value the of live sports content market is anticipated to grow by 3.4% by 2020. While the company struggled in 2019, I believe that management’s pivot away from the Network and towards monetizing content rights positions them to re-accelerate growth. Though WWE has provided the portfolio with a significant return during its tenure, I am not certain that the downside from 2019 operating results and guidance revisions has been fully reflected in the stock price and therefore believe we should continue holding the position.

A Current AIM Small Cap Equity Holding: Innospec (IOSP, $98.52): “Can Innospec Continue to Fuel its Growth?”

 Innospec (IOSP, $98.52): “Can Innospec Continue to Fuel its Growth?”

By: John Nick, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary 

• Innospec Inc. (NYSE:IOSP) develops, blends and supplies fuel additives, oilfield chemicals, personal care, and specialty chemicals through the following segments: Fuel Specialties, Performance chemicals, Oilfield Services, and Octane Additives. The Fuel specialties segments supplies a variety of specialty chemical products that act as additives to fuel, distributing primarily to aviation and marine applications. The Performance chemicals segment provides technology-based solutions for customers’ processes or products focused in the personal care, agrochemical and mining industries.  The Oilfield Services segment develops and markets products to prevent loss of mud in drilling operations, chemical solutions for fracturing, stimulation and completion operations, and products for oil and gas production. The Octane Additives segment produces tetra ethyl lead for use in automotive gasoline and trading.

• IOSP recently reached its 52-week high (107.10 ion 11/06/19) as a result of historically high revenues in the third quarter of FY 19’. These revenues were primarily driven by Fuel Specialties and Oilfield Services.

• Eco-friendly initiatives including IMO continue to drive IOSP revenues and seem to offer vast potential for Innospec moving forward.

• Management recently announced an ex-dividend on the 13^th of November incentivizing investors to purchase shares before the 18^th in order to receive a $.50 dividend payable on the 29^th of November.

Key points:

Management has focused on increasing gross margins while keeping performance strong in a struggling industry. The chemical product industry has steadily declined from 2014-19 at an annualized rate of -.4% and is expected to continue this shrinkage at a rate of -.3% over the next five years through 2024.  The primary reason for Innospec’s ability to fight these headwinds in a struggling industry is largely attributed to their diverse product portfolio. They have recently expanded upon this portfolio with their Drag Reducing Agents (DRAs) business.

IOSP has continued to capitalize on their diversified product portfolio through the most recent quarter by showing a 2% growth in third quarter sales despite a 13% decrease in Performance Chemicals sales by increasing sales in their Fuel Specialties and Oilfield Services segments by 7% and 17% respectively. Further, they have increased their operating income and EBITDA by 14% by increasing their margins. With this cash flow they have reduced debt to 22 million, a mere .1X EBITDA.  

IOSP has capitalized on the paradigm shift towards a more environmentally conscious society. Their Fuel Specialties and Oilfield Services segments have especially benefitted from this shift. For Fuel Specialties, the International Maritime Organization’s (IMO) initiative has been a primary driver of growth. The IMO is the UN’s body responsible for the safety and environmental impact of the shipping sector. Their 2020 initiative states that they will reduce the global sulfur cap to .5% by 2020, from a cap of 3.5% at the time of announcement. Innospec has a specialty in sulfur reduction and this has positioned them to benefit from these regulations.

What has the stock done lately?

Innospec released its quarter 3 earnings report on November 5, 2019 and hit its historic and 52 week high at $107.10 intraday on the 6^th, closing at $100.31. Currently it is priced at $98.52 a share and shows stable pricing relative to its 52-week high about of month ago. 

Past Year Performance: 

IOSP has increased in value by more than 59% over the past year. This growth is incredible but the main question become: is this growth sustainable. It recently hit its record high and Innospec is aware that these immense growth rates are not consistently obtainable. However, investors are optimistic about Q4 earnings are believe stable growth will be within IOSP’s capabilities. Further, Debt has been substantially reduced over the past year and management enjoys rewarding shareholders by distributing excess cash towards dividends.

Source: FactSet

My Takeaway

Innospec’s strong performance in a struggling specialty chemical industry is certainly an impressive feat as well as a strong positive for shareholders. By leveraging their product portfolio diversification they are battling the cyclicality of the industry and should be able to see strong performance going forward. Further, IOSP shows constant hungry for growth as it has shifted its product portfolio into the increasingly popular Drag Reducing Agents (DRAs) space. They are building the infrastructure to mass produce and distribute DRAs and should be able to capitalize on this largely untapped market, realizing hefty returns on their top and bottom line. Additionally, their constant focus on environmentally friendly products positions them to benefit in today’s increasingly conscious social environment. This aspect of the company is especially exciting to me considering the consistent emphasis we put on ESG at Marquette.  I believe our position in this company is secure and that additional returns will be materialized.

Source: FactSet

A Current AIM Small Cap Equity Holding: ShotSpotter, Inc. (SSTI $23.57): “Spotty Stock”

 ShotSpotter, Inc. (SSTI $23.57): “Spotty Stock”

By: Jimmy O’Brien, AIM Student at Marquette University

 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• ShotSpotter, Inc. (NASDAQ:SSTI) provides gunshot detection solutions to help law enforcement identify, locate, and respond to gunshots. Their systems are offered on a subscription model basis with the life of an average contract ranging between 1-5 years. Through this subscription they design, implement, manage, and maintain the systems for their customers. Currently, SSTI has contracts with 100 cities in the United States. They generate 97.4% of their revenues in the United States and 2.6% in South Africa. ShotSpotter made their IPO in 2017 and is headquartered in Newark, CA.

• SSTI has not grown their revenues at the pace they expected and decreased guidance 5-7% the last quarter.

• Their target market has not changed, but SSTI has run into difficulties with the timing of their contracts and acquiring new customers.  

• Management stresses the importance of a long-term outlook for SSTI and are confident that the value proposition still remains intact.

• The stock is extremely volatile and SSTI has not shown much transparency into their financial future.  

Key points: 

ShotSpotter has lowered their revenue guidance for EOY2019 for the second straight quarter from 21-28% growth down to 15-17%. This is a result of prolonged contract negotiations between Universities and Government Agencies. However, SSTI has been able to increase their profitability despite not meeting revenue expectations.

In the Q3 earnings call, Chief Executive Officer Ralph Clark stressed the importance of looking at the company with a long-term mentality. Due to the timing of their contracts it is difficult to value the company based on quarter performances. This is why the guidance has been lowered continuously and is difficult for them to estimate, but the market size still remains the same. The main driver for SSTI is their lack of competition in the market and the value proposition of their systems still remains intact.

The main problem for ShotSpotter is acquiring new customers. With the recurring revenue from their subscription based service they have a good foundation to build on, but are not expanding as quickly as they expected. They recently announced a new deal three year deal with Puerto Rico for 4.6 million, which will be activated in 2020. This is in line with their growth strategy that is still targeting major US cities of Houston, Dallas, and Charlotte. They believe the contracts they are currently negotiating are going to come to fruition, but are not confident on the timing. This is promising, but does not give any real insight into their future.

What has the stock done lately?

ShotSpotter’s closing price of $23.60 is up 14.42% over the last month. This is a result to earnings beating estimates, despite missing on the top line. The EPS of $.04 came in one cent above expectations, but showed a positive sign for a company that has not been profitable on an annual basis yet. Furthermore, the company is showing positive signs of growth from the contract with Puerto Rico.

Past Year Performance: 

ShotSpotter has been getting rocked in this highly volatile year. SSTI has a 52 week range of $18.44-$58.61 and are down 37.33%. This volatility has come from their inability to show real clarity into the financial future for the company and inability to become profitable on an annual basis.

 Source: FactSet

My Takeaway

ShotSpotter was added to the AIM small cap fund in March of 2018. Since then it has well exceeded the price target of $27.00, but has also fallen well below it. The extreme volatility of the stock is expected from a company that has not yet proven to be profitable. Although the long-term outlook for the company yields some positive possibilities, there is very little clarity into ShotSpotter’s ability to acquire new customers in a timely fashion. For this reason, I recommend ShotSpotter should not be held in the AIM portfolio and is replaced with a more stable company.

Source: FactSet