BB's Stock Haven

[smakkdaddy]

http://seekingalpha.com/article/2325075-iteris-accounting-delay-offers-compelling-entry-point

Iteris: Accounting Delay Offers Compelling Entry Point


Jul. 21, 2014 5:00 AM ET | About: Iteris, Inc (ITI), Includes: FLIR, ISNS
Subscribers to SA PRO had an early look at this article. Learn more about PRO »



Disclosure: The author is long ITI. (More...)






Summary
•10-k was delayed due to a mix of bad luck and poor execution; however, we do not see this delay impacting the intrinsic value or being a harbinger of further bad news.
•Our research indicates the revenue recognition question only impacts the timing of revenue and pertains to less than 2% of total revenue.
•Our research also indicates the financial data on the cash flow statements and balance sheets is correct and will not be restated.
•The underlying business is experiencing fundamental strength. With stock trading below book value and pristine balance sheet ($20m in cash and zero debt), we see an attractive risk/reward profile.
•We estimate the intrinsic value for ITI is $2.40 per share or +55% upside.

Disciplined value investors look for meaningful divergences between stock prices and business fundamentals. We wait patiently for situations where transitory influences inject unwarranted fear or euphoria into a stock price. We believe the recent drama surrounding Iteris' delayed 10-k has created one of these opportunities.

Our research indicates Iteris' 10-k was delayed due to a mix of bad luck and poor execution; however, we do not see this delay being a harbinger of further bad news. We believe the accounting issue is contained entirely to the timing of revenue recognition between certain quarters. Our research indicates the financial data on the existing cash flow statements and balance sheets are accurate and will not be adjusted. We believe the amount of revenue that is potentially categorized in the wrong quarters is less than 2% of total revenue.

We believe Mr. Market has overreacted and is ignoring the positive fundamentals of the underlying business. Investing in companies with accounting issues can seem like a daunting proposition but investors should take comfort that ITI has been a public company for 19 years and it has generated positive free cash flow each year for the past 7 years. We have spent considerable time with the CEO, Abbas Mohaddes (CEO since 2007, owns 2.7% of the shares outstanding) and all of our background checks indicate that Mr. Mohaddes is highly respected in the Southern California business community.

While the accounting snafu is disappointing, we don't think this matter impacts the intrinsic value of Iteris. The underlying business is experiencing fundamental strength despite what the stock chart says. With the stock trading below book value and a pristine balance sheet ($20m in cash and zero debt), we think the current stock price offers an attractive risk/reward opportunity. We estimate the intrinsic value for ITI is $2.40 per share or +55% upside.