PCTEL,
Inc. (PCTI, $7.75): “PCTEL Investment Thesis in Critical Condition”
By:
Joseph Amoroso, 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
• PCTEL, Inc. (NYSE:AIG) provides performance critical telecom
solution for wireless networks. The company operates across North America, Asia
and Europe with two product segments: Connected Solutions and RF Solutions.
• The proliferation of Small
Cells, 5G, and the Internet of Things (IoT) represent exciting growth
opportunities for PCTI.
• Contrary to
expectations, revenue mix has not changed since first being added to the AIM
portfolio.
• Company has experienced
significant customer consolidation.
As we look ahead to the
expansion of 5G, management is very optimistic about the positioning of the
company in being able to capitalize on the next big jump in wireless
networking. Due to the higher frequencies of a 5G network, these frequencies
travel much short distances which inherently creates the need for more small
cells. Small cells mark a change away from traditional macro cell towers which
broadcast network access across a wide distance.
Conversely, small cell allows
for many small and densely placed cells to together provide widespread access.
This operates the same way MU Wireless operates with all of those small white
boxes placed in the ceiling tiles all across campus. Management expects small
cell shipments to more than double by 2020 which would result in more than 10M
units being shipped. It is anticipated that by the very nature of 5G, high
frequency and short distance, 10x the number of base stations will need to be
employed in order to handle the network as opposed to the existing 4G
infrastructure.
Originally, the company
was pitched under the prediction that the company’s higher margin business, RF
solutions, would rapidly begin to grow as a share of total revenue moving
towards 2020. Ultimately making up nearly 50% of total revenue. This
represented a significant driver of revenue growth and margin accretion.
However, the revenue mix has stayed about the same with RF solutions
representing 32% and Connected Solutions representing 68% of total revenue in
fiscal year 2016. Instead, significant growth is coming from within the
company’s Connected Solutions business where antennas used in wireless devices
and cellular networks represents the company’s top growth market.
Management
has made an effort to divest itself of lower margin businesses over the past
few years, but the key migration to RF representing a greater percentage of
total revenue has yet to materialize.
Finally, another
significant driver for the company was that they had a diversified customer
base. However, the company recently announced that Huawi, a key Asian customer,
now accounts for more than 11% of total fiscal year 2016 revenue. Additionally,
with the anticipated growth in small cell shipments companies such as China
Mobile, Vodafone, and Verizon will continue to grow as a part of revenue.
What
has the stock done lately?
In the last month, PCTI
is up more than 30%. This was largely driven by a Sell-Side initiation from
Lake Street Capital Markets at a price target of $8.00 and as a result of Wunderlich
Securities raising their price target from $7.00 to $8.50 in addition to other
macro variables. This recent support for the stock appears to be a unique exit
point as some of the drivers behind the company’s original admission to the AIM
portfolio continue to deteriorate. Furthermore, the company plans to release Q1
earnings on May 9th with consensus EPS of $0.03 which has the
potential to result in increased price volatility.
Past
Year Performance: PCTI has increased 72.32% in value over
the past 12 months. After originally being pitched at a price of $5.96, PCTI
proceeded to fall below $4.50 before experiencing significant upward momentum
in 2017.
My
Takeaway
Despite significant
growth within the exciting 5G and IoT markets, the drivers for this company
have not materialized as expected. A critical driver of margin accretion driven
by RF solutions increasing their total share of revenue from ~30% to ~50% has
not occured and connected solutions continue to remain the largest and fastest
growing revenue source for the company, with RF remaining stable. Ultimately, I
believe we have a unique opportunity to exit this position before leaving for
the summer while still recognizing an upside of 29.53%.
