A Low-P/E Player in Smart ID Cards

04/07/2010 12:00 pm EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of SmallCapInvestor.com Pro, finds an economical entry into the soaring demand for personal security.

With governments already committed to expanding the use of smart ID cards, we’re adding shares of LaserCard (Nasdaq: LCRD) to the Small Cap Investor PRO portfolio in order to reap profits from this global trend. Shares of this profitable technology company could rise 50% in the next year if the management continues to deliver revenue and profit growth to shareholders.  

In order to reduce crime, advocates of identity solutions say we need to step up efforts and mandate smart ID credentials for all citizens. In fact, the demand for smart ID cards has created a market opportunity greater than $1 billion annually.

In the most recent quarter of fiscal year 2010 (ending March), the company’s gross margin on their optical memory cards reached 55%, a significant increase over the 46% gross margin in the comparable quarter of fiscal 2009. The improvement was due to favorable economies of scale—the result of increasing production volumes. This situation is exactly what we like to see in a small-cap technology company.  

The company's flagship product is its optical memory card (OMC), a customizable card that can both hold data and provide ID verification. It is currently being used by a number of governments for immigration control, driver's licenses, vehicle registration, and to prove citizenship. This card can hold over four megabytes of data and can withstand incredible abuse over its useful life.   

In the most recent quarter ending December 31, 2009, LaserCard reported revenues of $12.4 million, a 14% jump over the same quarter a year earlier. A strong net income margin of 10.8% resulted in $1.35 million in net income and earnings of 11 cents per share.

In the next quarter, I’m looking for moderate revenue growth to $13.55 million. A conservative revenue growth estimate of 10% and an earnings growth projection of 13% should result in fiscal 2011 revenues of $63.8 million and earnings of 60 cents per share.   

Despite four consecutive profitable quarters, an average gross margin of 45%, and a profit margin of 10.8%, LaserCard’s stock is still trading at a discount to industry peers. In fact, with a trailing P/E of 12.8x, LaserCard’s stock is deeply discounted. Other security stocks like OSI Systems (Nasdaq: OSIS) and L-1 Identity Solutions (NYSE: ID) are trading with trailing PE’s of 18.3x and 48.4x, respectively.  

I believe shares of LaserCard are currently undervalued. Given the company’s strength in this growing market, shares should trade at a multiple of 18x my projected fiscal 2010 earnings of 53 cents. This valuation accurately reflects the risks faced by this small, yet sophisticated tech company.

A target P/E of 18x results in a share target of $9.50, a 50% increase over the current price. This would put shares back near their 52-week high of $9.84. (LaserCard closed Tuesday at $6.66—Editor.)

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