Technology firm Telit Communications (LON:TCM) received the resounding backing of City broker Investec, which began coverage of the stock with a buy recommendation and a 120 pence a share price target (current price 86p).
The company is a world leader in machine-to-machine (M2M) communication, which very simply allows machines to talk to each other via a wireless network. Telit is the only pure play M2M company listed in London and one of the market’s big three players.
“In an increasingly connected world, demand for machine-to-machine communication is set to grow rapidly,” said analyst James Goodman setting out his investment thesis.
“We estimate that at the moment there are around 150m connected devices out of a total potential of 50bn.”
M2M communications has multiple applications. The technology will allow new electricity and gas meters installed in a house to remotely send data back to a utility provider and cars to send information to insurance firms or to the nearest search and rescue team.
In fact, technology exists today to allow your car to talk to your mobile phone, or your fridge to your stove.
And as smaller and cheaper computers are designed to process more data while consuming less power, so the M2M market will continue to expand and the number of applications that will be completed remotely will increase exponentially.
According analysts forecasts the market could be worth $1.5 billion by 2014. Telit’s rivals include Motorola, Gemalto and Sierra Wireless.
Given the encouraging market fundamentals, Investec’s Goodman is forecasting Telit’s earnings per share will grow at a compound rate of 50 per cent over the next three years.
“We have not built any share gains into our model and grow Telit in line with the market, while we forecast Motorola to grow below trend,” he said in a note to clients.
“We view this as an ultra-conservative growth estimate which should provide upside. Given the high fixed-cost nature of the business, this growth will drop straight through to the operating line.”