Sierra Wireless Inc

Sierra Wireless Inc (TSX: SW) is a leading wireless communication equipment designer and Device-To-Cloud IoT solutions provider. The company's portfolio of products and services contains high-speed cellular modules and services such as connectivity services, cloud platforms, etc.

Why Should Investors Book Profit?

• Week Financial Numbers in Q3FY21: In Q3FY21, the company reported a drop in revenue to USD 82.5 million compared to USD 113.4 million in pcp. The decline in sales was mainly attributable to weaker hardware sales due to Vietnam's production capacity restrictions. Its net loss widened to USD 37.9 million in the reported period, compared to USD 12.0 million in Q3FY20, due to reduced revenue and greater operating expenses.

• Lower Margin Profile v/s Industry: In Q3FY21, the company failed on maintaining its pace and witnessed lower performance under the operating margin matrix, comprising gross, EBITDA, operating, and net margins, which exhibits the pressure on the company.

Source: REFINITIV, Analysis by Kalkine Group

• Weak Liquidity Profile: In Q3FY21, the company's quick ratio was 1.04x compared to the industry median of 1.41x, while the current ratio stood at 1.51x against the industry median of 1.72x. These lower ratios against the industry indicate that its short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Long Cash Cycle Days: The company's cash cycle (days) has increased compared to the previous sequential quarter, which means it takes more days to convert its inventory to cash. In Q3FY21, its cash cycle stood at 162.5 days against 95.1 days in Q2FY21. This figure is very high even when compared to the industry median, which is at 93.8 days.

• Stretched Valuations: SW shares are available at an NTM Price/Cash Flow multiple of 15.8x compared to the industry (Communication and Networking) median of 13.7x, while on NTM EV/EBITDA multiple, it is trading at 41.0x compared to the industry median of 9.5x. This implies that the shares are overvalued against the industry.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation

The corporation recently released its Q3FY21 financial results, which showed a drop in revenue and a widening of net losses, indicating that the firm is losing its luster. Furthermore, the company's performance was weaker in the operating matrix, with negative operating, EBITDA and net margins, implying pressure. Moreover, compared to the peer average, its liquidity ratios are on the lower side, and its cash cycle days are on the higher end, indicating an adverse liquidity profile. Recently, the stock witnessed a healthy rally on the daily price chart and has re-touched its previous resistance level, which it attempted but failed to breach. As a result, there is a strong likelihood of price consolidation or decline in the short term. Hence, based on the above rationale and valuation, we recommend a "Sell" rating on the stock at the closing price of CAD 22.82 on November 22, 2021.

One-Year Technical Price Chart (as on November 22, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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