Thank TikTok for This Auto-Safety Company's Rising Returns

The 'Kia Boyz' have car owners worried...

Auto theft has been on the rise for years. Before the pandemic, the U.S. saw an average of 50 thefts per 100,000 residents each year. That number rose above 70 per 100,000 for most of 2022.

And as of this past June, it hit 87 thefts per 100,000 residents.

If you were hoping to blame social media for the increase in car thefts, you're in luck. A popular TikTok trend called the "car theft challenge" took off during COVID-19. And authorities say it's at least part of the problem...

At Altimetry, we're not in the business of providing "how to" manuals for stealing cars. So suffice it to say, the trend started in 2021, when a TikTok user posted about a flaw in certain Kias and Hyundais. The oversight made them easy to steal with supplies you likely have at home.

The video took off... and led to a resurgence of hot-wiring and auto theft for vulnerable cars, especially Kias and Hyundais. Those who take part in the challenge call themselves "Kia Boyz."

About 9 million vehicles still lack the technology to prevent this kind of theft today. Back in May, Kia and Hyundai agreed to pay out $200 million to settle a class-action lawsuit over the vulnerabilities. 

In short, the Kia Boyz have been a massive public-relations disaster for these car companies.

While they're trying to fix the problem as fast as possible, one anti-theft technology company couldn't be happier. It has been busy picking up the slack from Kia and Hyundai... and it still has plenty of room to grow.  

Even though Kia and Hyundai are making changes, a lot of customers have lost trust in these brands...

While that's bad for them, it's great for third-party auto safety company Ituran Location and Control (ITRN).

Ituran is a global leader in vehicle safety and recovery solutions. Its anti-theft software helps detect and prevent theft, as well as recover stolen vehicles.

Ituran's technology comes with a GPS receiver, cellular antenna, and backup battery that are hidden in the vehicle. These components allow the company to track the vehicle's location... even if it's towed or driven to a remote area.

If a vehicle is stolen, Ituran's team of experts will work with law enforcement to recover it as quickly as possible. The team can also disable the vehicle remotely and track it in real time.

Ituran currently has more than 2 million subscribers, including major car companies like Volkswagen (VWAGY). And with the rise of the Kia Boyz, its subscription revenue is rising... fast.

Second-quarter subscription revenue reached an all-time high of $59 million in August, up 13% year over year. The company added 47,000 new subscribers in the quarter.

Ituran is benefiting as folks turn to outside sources to protect their cars... and we can already see a correlation with its profitability.

Before the pandemic, Uniform return on assets ("ROA") was already a respectable 18%, above the 12% corporate average. Since 2020, its business has gotten even better. Uniform ROA was almost 25% last year.

The Kia Boyz have proved that auto theft isn't going anywhere...

So it stands to reason that Ituran's business will continue growing and improving.

And yet, the market doesn't seem to get it at all. We can see this through our Embedded Expectations Analysis ("EEA") framework...

The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, investors expect Ituran's Uniform ROA to sink to 9% by 2027. That's below the corporate average... and way below Ituran's recent performance.

Take a look...

Ituran's business has been trending higher since the pandemic. The market for stolen-vehicle tracking software is expected to keep growing 8% per year.

And yet, investors expect returns for Ituran – the market leader – to reverse course.

With car theft rates on the rise and car companies investing heavily in security features, it makes no sense to forecast declining returns for Ituran.

As investors, we love to see that sort of disconnect...

With Ituran dominating the market, it's only a matter of time before investors realize its performance isn't a fluke. They'll chase the stock higher with every impressive earnings report... And folks who get in now could book significant upside.

Regards,

Joel Litman
September 21, 2023