Delivering earnings growth just isn't enough for a company like NetComm Wireless Ltd (ASX: NTC) with the stock tumbling to a one-year low after management posted a doubling in net profit after tax for the six months to end December last year.
It isn't so much the results but disappointment over the lack of any large contract updates that sparked today's sell-off with NetComm crashing 22.5% to 38 cents during lunch time trade even as the company reported a 124.5% uplift to interim net profit of $360,000.
The machine-to-machine (M2M) device maker has been touting the multi-billion dollar M2M market (which refers to disparate equipment communicating to each other over a network) and its portfolio of global industry leading partners for some time now, but has yet to show any material revenue generation from outside Australia.
Patience is a rare commodity in the stock market and those with an investment horizon of more than a year should use the sharp dip as a buying opportunity. I think the M2M market opportunity is real and that NetComm is well placed to benefit from the industry's growth over the next few years.
If anything, the interim results have given me more confidence about the company's outlook. While the lift in net profit was positively impacted by tax benefits, earnings before interest, tax, depreciation and amortisation (EBITDA) increased by a respectable 16.3% to $2.3 million.
I was anticipating a backward slide for both the half and full year because the previous period was bolstered by the one-off AusNet smart metering contract and I was concerned that wireless device sales to the National Broadband Network (NBN) would not be enough to replace the lost revenue.
I was wrong and management is forecasting an increase in EBITDA for the full year although no specific guidance was offered. The growth in earnings is commendable particularly because it includes the $1.2 million investment management is making to grow the business.
One of the biggest challenges in valuing NetComm is trying to forecast revenue, which has historically been lumpy. While management has gone some way to addressing this issue, only around half its forecasted revenue for 2014-15 can be considered recurring.
However, there are a number of large growth avenues ahead for NetComm. The increased rollout of the wireless component for the NBN is one with management tipping a substantial ramp up in sales in the second half and 2015-16 financial year.
AusNet could also put in additional orders for NetComm's wireless module for its smart meters that are not communicating to the network. These 300,000 odd problematic smart meters use a module that is manufactured by another company.
Part of NetComm's share price plunge could reflect disappointment that AusNet is not ordering the modules now, but it has always been my assumption that the orders would only come in next year after AusNet fixes its back office systems, which are unable to cope with the smart meter rollout.
Predicting a large offshore order is more problematic, although NetComm is working on a number of trials with global partners.
Even if I largely ignored the international opportunities and factored in relatively modest 10% underlying revenue growth for the next three years, my discounted cash flow-based price target comes in at around 60 cents a share.
