The Uncommon Idea in Brief
Buy Control4 (CTRL) for the long term. (Published July 5, 2017)
-Begin building a position around $15 and add aggressively on any post-earnings pullback in price driven by the anticipated cyclical weakness.
The Industry Opportunity
The smart-home business is in its infancy, so there are huge opportunities for companies with early significant market share in the sector.
People want the convenience and the confluence of home operating systems. The ability to integrate audio, video, lighting, temperature, security, communications, plus other devices once seemed a bit sci-fi.
The overall connected home market should reach $133 billion by 2021, with a compound annual growth rate (CAGR) of 27.2%, according to a study by Compass Intelligence.
At the moment, 63% of leading home systems companies use Control4 automation technology, giving it the lead spot, CEPro reported.
What Control4 Does
Control4 offers home automation operating systems for audio, video, lighting, temperature, security, communications and other devices such as Amazon’s (AMZN) Alexa.
The company is 100% focused on the connected home, with more than 276,000 home and business installations in 97 countries to date.
Control4 isn’t without competition in professional installation and managed services. Most folks will know names like AT&T (T), Comcast (CMCSA), ADT (ADT), and Alarm.com (ALRM), but competition from the public names are at arm’s length at best.
The current competition is drawn from private sector companies Lutron, Savant, Creston, SmartThings, Nest Labs and URC. Nest is best known for its parent Alphabet (GOOG), but it has a concentration on comfort and security, so its competitive reach is limited. Creston focuses on audio and video, again just a part of what Control4 offers. Savant is similar to Creston, with audio, visual and lighting, while Lutron, as its name implies, focuses on light and shading.
The Uncommon Market Position
Control4 is one of the few players in the industry that brings together all the possible automation demands.
The company boasts top-name partners, including, but not limited to, Bose, Dish, Honeywell, JVC, Panasonic, Sharp, Pioneer, Pella, Sony and TiVo.
A wide range of brand-name partnerships offers the company a competitive advantage in pricing and product offering. It’s a one-stop offering with choice.
Control4 has a dominant market share, even with small penetration of the overall potential market. The company is profitable, growing earnings and sales in the double-digits and holds no debt. Those are attractive phrases for any momentum investor with a timeframe of more than a week.
What Sets Control4 Apart
While the list of competitors may be lengthy, Control4 has partnered up with best-of-breed in every area of automation.
It recently acquired Triad Speakers to offer a layer of vertical integration without the limits of partnerships. Add in the recent acquisition of Pakedge, which does advanced networking and cloud network management, and Control4 expanded its reach of deals to 5,141 independent dealers and distributors.
Control4’s new RKI-Router with BakPak is a game-changer in terms of efficiency and customer satisfaction.
The product allows a dealer to manage and monitor an unlimited number of connected devices. Dealers can bring new customers online quickly and remotely monitor the process. The product can spot trouble in real time before it happens. This mitigates downtime and service calls and customers and dealers can avoid onsite support visits.
Financial Services – Control4 by the Numbers
Control4’s house of fundamentals has a strong foundation with room to expand.
The company reported record revenue of $57.4 million in 4Q 2016, up 34% from the prior year. Overall, revenue grew at 28%, including the acquisition of Pakedge Device and Software. Net income was $0.16 per share, a strong push from the loss of $0.03 per share in the same quarter a year earlier.
The company’s strong cash flow is a huge draw for investors. Cash increased to $61.9 million in 2016 up from $52.1 million, even after the $9.6 million purchase of Triad Speakers. Control4 anticipates this acquisition will be neutral to 2017 net income, but with no debt and strong cash flow Control4 can continue to seek out small acquisitions to fuel already-strong growth.
Since 2012, Control4 has registered consistent gross margins of 50%-54% while transitioning from a solutions product revenue base to platform products. Platform products have grown to one third of the company’s sales and hold a client attachment rate about 2x greater than simply providing a product solution.
Looking forward to 2017, management expects Q1 to be seasonably low for revenue. But revenue for the year should increase from $208.8 million to about $228 million to $232 million. Net income of $0.85 per share should rise into the $0.90-$0.98 range in 2017. It is important to note Control4 has been conservative with estimates over the past year while producing results $0.05 or more per share greater for the last four quarters.
Why the Stock Is a Buy
Getting into a small-cap growth stock like CTRL early on can reap serious rewards.
Unlike other momentum and small-cap growth names, an argument could be made for value with Control4. While shares currently trade with a P/E in the high 20s, the company’s forward P/E is expected to be around 15. Given growth forecasts in the 17%-20% range on both earnings per share as well as sales, combined with no debt and a couple bucks per share in cash, Control4 lands in rarefied air: momentum at future value pricing.
Raymond James upgraded the company’s shares to an Outperform rating after a strong fourth quarter.
Unsurprisingly with a growing tech company, lots of stock options have been given to employees. More than 16% of the total shares outstanding are held by insiders.
There have not been many insider buys of late, but most of the sales have been automatic sales. The company also said it is still looking to buy back more stock, depending on market conditions.
The Technical Analysis — At $20 or lower CTRL is a BUY
Control4 spent six months going nowhere in the back half of 2016. In February 2017, the stock exploded from $11 to nearly $16 in just a couple of days. Since that point, bulls have refused to look back, setting $14 as very strong support while establishing $16 and $18 as additional, albeit thinner, levels of support.
Strong, rising support above the 13-week simple moving average (SMA) has been a staple of the current breakout. The recent highs have created resistance in the $20 to $21 area. The consistent higher lows with the same highs has formed a very tight ascending triangle and there are two approaches to consider for entry.
The first approach is to take a partial position in the $19 to $20 range, anticipating the ascending triangle resolves to the upside. The remaining position would be purchased on the breakout. If shares do not break out, then investors should consider buying additional shares at the support levels marked in orange, with the first marked at $16.50. Consideration should be given at the $18 level as well, since there is a high probability the 13-week SMA holds as support, especially since it has not been revisited since May.
The second approach to consider is buying the breakout. Investors could choose to wait for a weekly close above the resistance level of the ascending triangle. Once above the resistance level of $21, shares should push higher. Our initial target on a breakout, independent of fundamental views, would be $24 in short fashion with an ultimate upside of $29 within 12 to 18 months, based on the current price patterns.
Catalysts for the Thoughtful Investor
Control4 is a rare company that provides its shareholders multiple catalysts for profit. CTRL has market advantages against its competitors in a growing market, is profitable and the stock is a momentum play at a value-centric entry multiple.
Control4 may be a leader in the connected home market, but penetration has been scant so far and therein lies the opportunity. The company has performed 276,000 home and business installations, but this represents a tiny portion of the potential.
The company targets households with an age range of 35-55, strong income, college educated and families with children. Currently, of the 14.1 million households in the United States, Control4 only has a 1.4% penetration rate. Households serviced by Control4 have 40+ devices eligible to connect.
The company operates 10,100 third-party consumer electronics products and has a flexibility to scale. The top 100 deals are less than 20% of Control4’s total revenue, so dependence is not a concern.
Single room revenue rates range from $1,000-$5,000, multiple rooms $5,000-$20,000 and whole home $20,000-$250,000.
Even if Control4’s penetration growth slows in the United States, the potential for growth in the other 96 countries offers significant upside for years to come.
On its latest earnings call, the company said it was focusing on growing its direct presence in Canada, the United Kingdom, Germany, Australia and China.
“China continues to be a place where we can add dealers on a quarterly basis, anywhere between high single digits and a dozen or two per quarter and that’s helpful,” Chairman and CEO Margin Plaehn said on the call. “Regions like the UK are much more mature. We have close to 500 dealers in the UK and we continue to grow that and prune that so that the net channel grows. But we’re not going to see dramatic growth there in the near term.”
The industry is still in its infancy and Control4 is one of the first companies to put it all together.
The Bottom Line
-Control4 is an early leader in the full home, high-end home automation market.
-The smart-home ecosystem is growing rapidly, with high barriers to entry and sticky customers. CTRL has limited competition and has successfully incorporated industry-leading technology partners and products.
-Control4 has only achieved a 1.4% penetration in its primary market of the United States. The potential market is not only huge, but also growing along with Control4.
-In the range of $12-$15, we posit CTRL a long-term buy and hold, although the small cap-nature, short interest and aggressive growth will make it volatile.
At the time of publication, neither the author nor the company held positions in the stocks mentioned, but positions may change at any time.