(By Kevin Donovan) Who hasn't opened a cell phone bill and screamed "EEK!"? Now multiply that reaction by a few multinational corporations and the market opportunity for Tangoe Inc. (TNGO) screams in response. That opportunity is undervalued, in our view, and we're buyers of this telecommunications management provider.
Our price target is $28, based on applying a conservative PE-to-growth ratio of just 0.75 to this year's earnings estimate. Earnings on a GAAP basis are expected to grow 33 percent next year and an average 58 percent annually over the next five years, according to consensus estimates. Using the current forward multiple of 27.5 and the estimated growth rate of 58 percent, we calculate a PEG of 0.47, far too low for Tangoe's growth prospects, in our view. Our target implies 115 percent potential price appreciation from Wednesday's close.
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Meanwhile, the $500-million market cap Tangoe announced Tuesday it would repurchase up to $20 million of its outstanding stock in the open market or in privately negotiated transactions. It's this kind of confidence in future value that lights up our radar screen.
Shares are down 14 percent year to date and have traded between$11.99 and $23.05 over the last 52 weeks. Tangoe has a limited trading history, having gone public in July 2011 at $10 a share.
Tangoe's market is every organization that wants to get a handle on its tangled web of communications devices. The company offers what it calls Communications Lifecycle Management (CLM) software and related services. Tangoe says it provides businesses of all sizes with solutions that deliver "optimal visibility, understanding, and control of enterprise-wide communications assets and related costs."
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Tangoe's Telecom Expense Management (TEM), Mobile Device Management (MDM), and Strategic Consulting solutions provide services that manage communications usage, assets, and expenses, including: expense allocation, assurance testing, mobile rate plan optimization, reporting and analysis, mobile help desk and device recycling. Its customers include Fortune 500 banks and pharmaceutical companies, as well as government organizations.
What could go wrong? An overreliance on acquisitions for revenue growth could mask organic potential. And Tangoe is not without its doubters (see here), who question the company's leadership.
But we think the demand for telecommunications expense management will only increase with the explosion of devices and the growing need for large organizations to get their arms around managing these crucial assets effectively. Tangoe could be in the sweet spot for meeting this demand
Based in Orange, Conn., Tangoe reported third-quarter non-GAAP earnings per share of $0.13 on revenue of $40.1 million, $36 million of which is recurring. The non-GAAP EPS result was up 100 percent from the third quarter of 2011. For the fourth quarter, Tangoe has guided to $42 million-plus in revenue and non-GAAP EPS of $0.15-0.16.