ICOP Digital: The right business at the right time
ICOP Digital Inc. (NASDAQ: ICOP)
Lenexa, Kan.
Website: www.icop.com
Rating: BUY
Initial Coverage: $7.05 – April 18, 2007
Price Target: $10.00
52-week low / high: $3.92 / $7.12
Shares Outstanding: 7.23 million
Market Capitalization: $51 million
Why We Like ICOP Digital:
- Strong revenue growth and declining losses with profitability predicted for 2008
- Climate of security and terrorism threats driving demand
- Global market for company’s solutions
ICOP Digital manufactures and sells security, surveillance and communication systems designed to protect people and assets from security threats. The company markets both mobile and stationary surveillance products used in the public and private sectors. Given the increased security concerns worldwide, the demand for security and surveillance products will fuel the company’s growth.
Formed only a few years ago in 2002 following the tragedy of Sep.11, 2001, ICOP Digital is in the right business at a most opportune time. The company’s motto, “Without local security, there can be no national security,” defines its vision to protect local interests via advanced monitoring products. A milestone for ICOP Digital was its approval as a GSA (General Services Administration) contractor by the federal government, which means the company’s products are more readily available to federal agencies by streamlining the approval process for submitting bids.
ICOP Digital may be early in its development, but its mobile products are already highly regarded by the law enforcement community nationwide. Its flagship ICOP Model 20/20, a digital in-car video recorder system, is quickly becoming a must-have tool in law enforcement vehicles spread across 48 states. In 2005, about 48% of law enforcement vehicles used in-car video, but the majority were based on the archaic VHS (analog) technology, according to the International Association of Chiefs of Police (IACP). VHS is an older technology with numerous limitations, while the newer digital technology affords many advanced features. There is currently a shift from analog to digital video technology, which will bode well for ICOP Digital.
In addition to the law enforcement market, the company is also working on marketing its ICOP Model 20/20 to a broader range of mobile applications such as the military, fire, ambulance, public buses, taxis, trains, and planes. The potential market for digital in-car video in the United States is estimated to be over $2 billion, according to the company. Moreover, growth is not confined to the United States, as the global market for security solutions is enormous and ripe for growth.
ICOP Digital’s long-term growth strategy includes positioning itself as a global brand for security and surveillance solutions. The company believes its ICOP Model 20/20 is presently the only product that fulfills nearly all of the proposed new minimum standards for digital in-car video systems as set by the IACP. This is a key advantage and provides excellent growth opportunities, since the IACP is comprised of 19,000 police executives in over 100 countries.
Also exciting is the growth of the Internet Protocol (IP) surveillance market in which ICOP Digital markets the ICOP Guardian, a stationary IP Internet-driven camera that is designed to provide real-time surveillance via the recording of high quality video images on a client’s local server. This product line has tremendous growth opportunities in areas such as schools, banks, office buildings, and government.
The future looks promising for the IP surveillance market as the demand for IP services is expected to surpass the traditional Closed Circuit Television (CCTV) systems by 2011, according to research firm iSuppli. The research predicts the global market for IP and CCTV video surveillance cameras will break $9 billion by 2011, up from $4.9 billion in 2006, for a CAGR of 13.6%. Yet the comparative growth rates favor the IP route. Sales of IP-based cameras for video surveillance are expected to rise to $5.7 billion by 2011, from $171,000 in 2005, for an estimated CAGR of 79.4%. Compare this to the CCTV segment, in which sales are predicted to decline to an estimated $3.3 billion by 2011, from $4.06 billion in 2005, representing a negative CAGR of 3.28%.
Key drivers for ICOP Digital going forward include new products, markets, and global expansion. In the second and third quarters of 2007, the company will introduce the ICOP Model 20/20-W, an advancement over the current 20/20 in terms of ease of use and wireless/GPS features, as well as being 15% to 20% cheaper than competitive products. Also to be launched will be the ICOP Model 4000, designed specifically for mass transit vehicles.
Another interesting product to be marketed will be the ICOP LIVE, a product that will deliver live streaming video captured on the ICOP Guardian or ICOP Model 20/20-W via a wireless network between first responder vehicles and headquarters. The product will enable video and data to be sent to and from a local server to a mobile target. The idea here is that critical situations could be more effectively handled if there is live coverage along with the ability to transmit key information located on servers.
Products are currently sold in the key markets of the United States and Canada vis-à-vis inside sales and distributors, but expansion into the secondary markets of Australia, Latin America, and the Middle East should also help to drive growth. Moreover, while China is yet to be a market, we believe there is clearly potential there as the demand for security products accelerates. ICOP Digital is expected to announce key contract wins in its international markets in the upcoming months.
Financial Results
ICOP Digital is a relatively new company with limited operating history but it has been reporting stellar revenue growth, with three consecutive years of year-over-year growth. Revenues surged 276% year-over-year to $6.62 million in 2006 from $1.76 million in 2005, up significantly from $0.05 million in 2004. Revenue in 2007 is predicted to increase 109.2% year-over-year to $13.85 million, followed by 80.5% growth in 2008 to $25 million, according to MDB Capital Group.
Despite the strong revenue growth, profits have yet to materialize but there are positive signs heading into 2008. The company reported losses from 2003 to 2006, but an encouraging sign is the last two consecutive years of declining loss per share. ICOP Digital reduced its loss to $0.58 per basic and diluted share in 2006 from a loss of $0.92 and $1.80 per basic and diluted share in 2005 and 2004, respectively. The outlook for 2007 calls for a continued decline in the loss to $0.12 per basic and diluted share, followed by profitability of $0.33 per basic and diluted share for 2008.
In the fourth quarter of 2006, revenues surged to $2.9 million, up 446% from $531,000 in the fourth quarter of 2005. The sequential growth was 85% from $1.6 million in the third quarter of 2006.
The fourth quarter loss declined to $813,000, or $0.12 per basic and diluted share, from the prior year’s fourth quarter loss of $1.2 million or $0.24 per basic and diluted share. There was also an improvement sequentially over the third quarter loss of $896,000.
Gross margins in the fourth quarter were 41.9%, down from 45.3% for the comparative fourth quarter of 2005 but an improvement over the 40.3% in 2005.
The balance sheet is sound, with excellent working capital, no debt, and cash and cash equivalents of $7.68 million, or $1.06 per share, at the end of the fourth quarter. The strong balance sheet allows the company financial flexibility to grow its business.
Competition and Risk
There are competing products but the company believes its ICOP Model 20/20 digital in-car video system is superior to other products as it satisfies more minimum standards dictated by the IACP. The next generation 20/20-W will offer an even more robust and cost effective alternative compared to that of its competitors. We believe the company’s strong product development focus will keep it ahead of its rivals.
The small size and short history of the company present added risk as a major fundamental shift in the company or industry could negatively impact operations. External risks include an economic downturn or a change in technology in the security and surveillance area. Company specific risks include a failure to keep abreast of the technological advances or failing to expand successfully in local and global markets.
Final Thoughts
ICOP Digital is heading in the right direction as demonstrated by its strong revenue growth and expected profitability by next year. The company has strong products, and the introduction of new products will help to drive growth.
Given the current climate of constant threats and terrorism, it is easy to understand why the security and surveillance markets offer exceptional growth going forward.
The stock remains largely unknown on Wall Street as there is minimal institutional ownership of just 0.30%. This affords investors an opportunity to enter into an early position before the market discovers the good story developing here.
We believe ICOP Digital represents a good risk-to-reward investment for the growth investor looking for the potential of strong share price appreciation. On this note, we are initiating coverage with a Buy rating and price target of $10.00, which represents a pricing multiple of approximately 30X the forward year analyst earnings estimate of $0.33 per share. We are comfortable with the high pricing multiple, given the expected growth in revenues of 109.2% in 2007 and a further 80.5% in 2008.
Note: This article is from the May 2007 issue of Rising Star Stocks, an independent investment advisory focusing on uncovering potential investments that are poised to revolutionize their industries. Rising Star Stocks is published monthly with an intra-month update and periodic special reports. For more information visit www.risingstarstocks.com
About the Author
Ian Wyatt is a co-founder and President of Business Financial Publishing and the Chief Investment Strategist and Publisher of SmallCapInvestor.com.
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