Telular Corporation (WRLS) - Small Cap stock with Huge Potential?

marathonic

NOTE: Please do your own research before considering buying into this stock. Also, if you decide to purchase some shares, make sure to use a limit order as opposed to a market order - this is a low cap stock and limit orders should always be used.

Having done a lot of research on Telular Corporation, I placed my first order of 2,000 shares today and intend to place an additional order for 1,000 shares for each 5% drop in the price of the underlying stock. My current basis per share is $4.59.

Based upon my interpretation of the annual report, the latest quarterly report, the investor presentation and the latest quarterly conference call (all of which are available in the Investor Section of their website), I believe the company should easily be a double by the end of 2011 - and continue to grow signigicantly from there.

The companies Telguard segment is growing rapidly and product sales surpassed expectations - resulting in the company announcing increased expectations of 30,000 - 40,000 unit sales per quarter (I believe that even the increased expectation is quite conservative) for the rest of 2010. I can easily see the company hitting the 1,000,000 subscriber milestone by the end of 2011. This will result in a much higher proportion of revenue coming from recurring service revenue as opposed to product sale revenue. With a Gross Margin of 60% for service revenue versus a Gross Margin of 21% for product revenue, this change in revenue source will result in significantly higher overall Gross Margins for the company. The Gross Margin currently stands at 40%.

Regarding the Tanklink segment of their operations, they seem to have focused on merging this segment into their company during 2009 and are now in a good position to focus on growing this segment significantly. The Tanklink system is also based on recurring, high-margin revenue after the initial sale of the lower-margin equipment which is a huge positive. I also see alot of potential growth in this area but am of the opinion that the significant growth won’t materialize until next year and beyond.

The third segment of their business is the Terminal segment. However, personally, I didn’t factor this in when I decided to invest in the company - I view it mainly as a ‘bonus’ additional stream of revenue but it’s the recurring revenue that I like about Telular and this isn’t obtained via the Terminal segment.

As per the annual and quarterly reports, Telular sold 21k, 25k, 31k and 38k Telguard units during the last 4 quarters. If this trend were to continue, the company will have no problem exceeding their current guideling of 30k - 40k units per quarter over the next three quarters and also will have no problem exceeding 1,000,000 Telguard subcribers by the end of next year. This, together with the growth in their Tanklink segment should easily result in an increase in the stock price to close to, or above, $10 per share.

Other positives about the company include the fact that it repurchased alot of it’s shares last year at sub $2 prices, it has over $20 million in cash (about 30% of it’s market cap) and has no debt.

Personally, I view this as a long-term, core holding of my portfolio and am going to add more shares on any dips.

marathonic

Well, it looks like a nice rise in Telular today on high volume. The shares have surged almost 10% so far in today's session and currently stand at $5.08.

I could sell now for a handy $1,000 gain but, like I said in my original post, I'm looking for a double in this company.

I'm not 100% sure what caused today's rise (the problem with small-cap companies is that news isn't heavily reported). The entire sector is up quite a lot today but Telular is up significantly more than the average gain.

strmin

I guess Qualcomm lifted whole sector today. It fell a lof since January but today bounced back.

marathonic

Yeah, that's true. Qualcomm definately was a huge help during yesterday's rise. It's actually one of the other companies that I have on my Watchlist and am considering buying.

Obviously, it would have been nice to get in before yesterday's rise but I've been interested in the company since late last year when it was trading at $44.67 so, even after yesterdays rise, it's still trading slightly over 15% below what I had initially thought was good value.

QCOM is a $60b+ market cap company and, therefore, the price should be a lot more stable than that of Telular. I think there is currently a lot of short covering in the company and would expect to see a pullback pretty soon - when the short covering dries up and the 'possible' period of profit taking materialises.

Depending on what the market does today, I may sell some Naked Put Options for April expiry. I'd like to see a little pullback first though - enough to raise the Premiums available on the Apr10 36 Put Options to about $1.

This would give me a basis per share of $35 if assigned. Also, QCOM doesn't report earnings until 20th April (after April Options expiry). Therefore, if the shares are assigned at $35 and, as I expect, earnings are good, I will participate in any increase in share price as a result of earnings.