Static Grows at CalAmp Amid Aggressive Acquisition Strategy

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The wires got crossed at CalAmp Inc. this month after it reported its first net loss in several years even as the company was just added to the widely watched Russell 2000 Index.


Best known for its direct broadcast receivers used by satellite TV subscribers, the Oxnard-based company has been on an expansion spree. But it got tripped up when it took one-time charges in the latest quarter related to a recent acquisition.


Shares are now off nearly 60 percent since reaching a 52-week high of $13.90 in late April, closing at $5.83 on July 19. Still, the two analysts who cover the stock remain fairly bullish, with one maintaining a “speculative buy” and the other still favorable despite a downgrade.


“In our view, CalAmp shares are cheap, especially considering the cash the company is generating,” said analyst Matthew Robison at Ferris, Baker Watts Inc., who cut his recommendation on shares from “buy” to “neutral” in April. “But we continue to see caveats in the company’s business model. There are a lot of moving parts in CalAmp these days.”


Cal Amp generated record cash flow from operations in fiscal 2006, ending the year with $45.8 million in total cash, with net cash from operations of $22.4 million, up 79 percent from the previous year. (Though in the first quarter ended May 31, total cash fell to $30.8 million, with total outstanding debt rising to $38 million from $7.7 million due to acquisition activities.)


The share price drifted downward after the wireless communications company’s revenue in its fiscal fourth quarter, which ended Feb. 28, came in below its guidance and analyst expectations.


Then CalAmp reported this month a net loss for its fiscal quarter of $34.1 million ($1.47 per share), down from a profit of $2.2 million (9 cents) last year. The loss included a non-cash charge of $6.9 million for the write-off of research and development costs by Dataradio Inc., a company it acquired.


CalAmp has been making a series of acquisitions aimed at making its revenue base more diversified and reliable, expanding into wireless tracking products, private wireless networks and public safety-oriented communications systems with homeland security applications.


The company launched its diversification strategy in 2004 after being forced to reduce its workforce by 50 percent in 2003 when it saw a big drop in orders from its satellite-television customers.


It began with the purchase of San Diego-based communications software developer Vytek Corp. Then in May it bought Dataradio, a privately held, Quebec-based provider of advanced wireless data systems for public safety, utility and other critical infrastructure clients for $60.1 million. Just prior to that announcement, CalAmp spent $2.4 million to buy Encino-based TechnoCom Corp.’s mobile-resource management product line, which is used to remotely track fleets of cars and trucks.


“We continue to execute on our strategy of building a significant business in the wireless datacom industry,” said Chief Executive Fred Sturm in a statement.


Prior to the May acquisitions, non-direct broadcast satellite business accounted for only 22 percent of total revenues. The new business lines would now raise that percentage to 33 percent, according the company’s annual report.


Cyclical downturns in its main product group have repeatedly shown the need for the company to diversify in order to satisfy Wall Street expectations for steady growth. EchoStar Communications Corp. and El Segundo-based DirecTV Group Inc. have begun reducing orders for CalAmp’s direct-to-home satellite receivers in anticipation of new models later this year that will include improved high-definition TV features. The company now controls around 50 percent of the U.S. direct-broadcast satellite market.


Robison expects the company will cut prices on its existing equipment to clear out inventory. He also expects that with increased competition from other satellite equipment makers, CalAmp may have an increasingly hard time achieving as high a margin as it would like for its next-generation equipment.


“Customers may be demanding more complex equipment, but they also may be forcing the margins on these higher-priced products further downward,” he said, in a recent investor note.


Meanwhile, the stock should get a boost from its inclusion in the Russell 2000 Index by drawing increased notice from fund managers. More than 2.5 million CalAmp shares changed hands when the index was updated June 30.

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