Ituran Location & Control Ltd. In-line Quarter, Big Dividend, Maintain Outperform

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1 EQUITY RESEARCH COMPANY UPDATE February 23, 2012 Stock Rating: OUTPERFORM mo. Price Target $16.00 ITRN - NASDAQ $ Yr. EPS Gr. Rate 8% 52-Wk Range $16.96-$11.27 Shares Outstanding 21.0M Float 15.9M Market Capitalization $282.4M Avg. Daily Trading Volume 13,828 Dividend/Div Yield $1.23/9.13% Fiscal Year Ends Dec Book Value $ E ROE 20.0% LT Debt $6.1M Preferred $0.0M Common Equity $124M Convertible Available No EPS Diluted Q1 Q2 Q3 Q4 Year Mult. 2009A x 2010A x 2011A x Prior (E) x 2012E x Prior (E) x TECHNOLOGY/EMERGING TECHNOLOGIES AND SERVICES Ituran Location & Control Ltd. In-line Quarter, Big Dividend, Maintain Outperform SUMMARY Yesterday, Ituran reported in-line earnings, $0.29 per share vs. our estimate of $0.28. Revenue came in a little light, $37.0M vs. $39.8M. This was primarily due to weakening currencies against the US dollar. Revenues fell 9% year over year while EPS was up a penny, further indicating a weakening currency. Management announced two surprises regarding its dividend. First, it announced it would pay 100% of net income as a dividend. This was better than our estimate of 50%. Second, it announced it would move to a quarterly payment. We believe this is a positive as it will better match cash flows. With a 9% dividend yield and steady growth from Brazil, we maintain our Outperform rating and $16 PT. KEY POINTS Growing Subscriber Base: Subscriber count rose 19,000 year-over-year and 4,000 sequentially. The sequential growth bettered our expectations, although still off from the ~10,000 quarterly run rate of last year. However, management believes its strategy shift in Brazil has been effective; thus, the shift should push growth rates back to their prior level. Service Revenue Still a Strength: High-margin services continue to be the primary company driver. Service revenue increased 11% from 2010 to 2011, based on a mix of a 3% subscriber increase and the remaining subs on better ARPUs. The price increase, we believe, is based on Brazil's lower customer churn strategy. Introduce Quarterlies: While management expects it can get growth rates back to the higher rates we have seen in the past, we have decided to be a bit more prudent. We see revenues slowly increasing sequentially based on a slowly accelerating pickup in subscriber base. Introduce Quarterlies II: We model flat product growth and moderate to slow operating expense increases. This leads us to expect modest sequential growth on both the top and bottom lines. We bump up our 2012 EPS estimate on lower than expected OpEx and an improvement in Ituran's subscriber base. Maintain Outperform: Aside from the appealing 9% dividend yield, we like that even during a transition period in Brazil, the company continues to build on its leadership position. We continue to believe a 12x forward P/E reflects a fair multiple. Hence, we keep our PT at $16. Stock Price Performance 1 Year Price History for ITRN Q1 Q2 Q3 Q Created by BlueMatrix Company Description Ituran provides location-based products and services, primarily for stolen vehicle recovery (SVR) and tracking services. It operates principally in Israel, Brazil, Argentina, and the U.S. Andrew Uerkwitz Andrew.Uerkwitz@opco.com Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures and Certifications" section at the end of this report for important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Oppenheimer & Co Inc. 300 Madison Avenue New York, NY Tel: Fax:

2 Ituran Location & Control Quarterly Consolidated Statement of Income Statement FY FY FY FY 1Q12E 2Q12E 3Q12E 4Q12E FY 2008A 2009A 2010A 2011A Mar-12E Jun-12E Sep-12E Dec-12E 2012E Location-Based Services $86,051 $91,574 $108,101 $120,410 $31,926 $32,079 $32,385 $33,150 $129,540 Wireless Comm. Products 46,565 29,807 39,724 39,757 9,814 9,912 10,011 10,111 39,849 Total Revenue $132,616 $121,381 $147,825 $160,167 $41,740 $41,991 $42,396 $43,261 $169,389 Cost of Service 31,801 34,060 40,977 49,293 13,090 13,152 13,278 13,592 53,111 Cost of Products 37,611 27,445 34,354 31,578 8,048 8,128 8,209 8,291 32,676 Total Cost of Revenue $69,412 $61,505 $75,331 $80,871 $21,137 $21,280 $21,487 $21,883 $85,788 Gross profit $63,204 $59,876 $72,494 $79,296 $20,603 $20,711 $20,909 $21,379 $83,601 Research & Development Sales & Marketing 9,628 7,684 8,675 8,543 2,212 2,268 2,205 2,336 9,020 General & Administrative 27,473 27,448 32,677 35,698 9,183 9,028 9,115 9,301 36,627 Operating Income $25,695 $24,372 $30,661 $34,424 $9,066 $9,272 $9,445 $9,594 $37,378 Interest Income (Expense) (166) 1, , Other Income (Expense) (1,652) 10 (1,025) (819) Pre-tax income $23,877 $25,986 $29,775 $35,705 $9,198 $9,424 $9,596 $9,744 $37,962 Taxes on Income (7,896) (7,139) (7,686) (8,950) (2,300) (2,356) (2,399) (2,436) (9,491) Affiliate income (25) 13 (3) (23) (1) (1) (1) (1) (4) Minority interest (1,074) (668) (1,071) (1,038) (250) (250) (250) (250) (1,000) Net Income $14,882 $18,192 $21,015 $25,694 $6,648 $6,817 $6,946 $7,057 $27,468 Operating EPS $0.80 $0.84 $1.08 $1.23 $0.32 $0.33 $0.34 $0.34 $1.30 Diluted EPS $0.69 $0.87 $1.00 $1.23 $0.32 $0.33 $0.33 $0.34 $1.31 Diluted WA Shares Outstanding 21,442 20,977 20,977 20,970 20,970 20,970 20,970 20,970 20,970 Source: Company Data, Oppenheimer & Co. Inc. Estimates. 2

3 Ituran Location & Control Margin and Growth Metrics FY FY FY FY 1Q12E 2Q12E 3Q12E 4Q12E FY 2008A 2009A 2010A 2011A Mar-12E Jun-12E Sep-12E Dec-12E 2012E Revenue Split Location-Based Services 64.9% 75.4% 73.1% 75.2% 76.5% 76.4% 76.4% 76.6% 76.5% Wireless Comm. Products 35.1% 24.6% 26.9% 24.8% 23.5% 23.6% 23.6% 23.4% 23.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Margin Analysis LBS Margin 63.0% 62.8% 62.1% 59.1% 59.0% 59.0% 59.0% 59.0% 59.5% Product Margin 19.2% 7.9% 13.5% 20.6% 18.0% 18.0% 18.0% 18.0% 17.0% Mixed Gross Margin 47.7% 49.3% 49.0% 49.5% 49.4% 49.3% 49.3% 49.4% 49.4% Research & Development 0.3% 0.3% 0.3% 0.4% 0.3% 0.3% 0.3% 0.3% 0.4% Sales & Marketing 7.3% 6.3% 5.9% 5.3% 5.3% 5.4% 5.2% 5.4% 5.2% General & Administrative 20.7% 22.6% 22.1% 22.3% 22.0% 21.5% 21.5% 21.5% 22.0% Operating Margin 19.4% 20.1% 20.7% 21.5% 21.7% 22.1% 22.3% 22.2% 22.1% Pre-Tax Margin 18.0% 21.4% 20.1% 22.3% 22.0% 22.4% 22.6% 22.5% 22.4% Effective Tax Rate 33.1% 27.5% 25.8% 25.1% 25.0% 25.0% 25.0% 25.0% 27.0% Net Income Margin 11.2% 15.0% 14.2% 16.0% 15.9% 16.2% 16.4% 16.3% 16.2% Sequential Growth Rates Revenue Location-Based Services -73.5% 0.5% 1.0% 2.4% Wireless Comm. Products 15.0% 1.0% 1.0% 1.0% Total -73.9% 0.6% 1.0% 2.0% Operating Expenses Research & Development -77.5% 0.6% 1.0% 2.0% Sales & Marketing -74.1% 2.5% -2.8% 6.0% General & Administrative -74.3% -1.7% 1.0% 2.0% WA Shares Outstanding -8.5% -2.2% 0.3% 0.3% 0.0% 0.0% 0.0% 0.0% 0.3% Year-on-Year Growth Rates Revenue Location-Based Services 33.1% 6.4% 18.0% 11.4% 5.2% 1.7% 7.7% 16.6% 7.6% Wireless Comm. Products -22.7% -36.0% 33.3% 0.1% -2.4% 3.4% -13.6% 18.5% 2.0% Total 6.2% -8.5% 21.8% 8.3% 3.3% 2.1% 1.8% 17.0% 5.8% Operating Expenses Gross Profit 10.5% -5.3% 21.1% 9.4% 3.5% 3.8% 0.0% 15.4% 5.4% Operating Income 10.1% -5.1% 25.8% 12.3% 2.8% 6.3% 1.5% 26.7% 8.6% Pre-tax Income -67.6% 8.8% 14.6% 19.9% 1.6% 3.5% 3.1% 18.3% 6.3% Net Income -71.1% 22.2% 15.5% 22.3% 2.6% 3.6% 4.7% 17.6% 6.9% WA Shares Outstanding -8.5% -2.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Diluted EPS -68.4% 25.0% 15.5% 22.3% 2.7% 3.6% 4.7% 17.6% 6.9% Source: Company data, Oppenheimer & Co. Inc. estimates 3

4 Ituran Location & Control Balance Sheet FY FY FY FY 1Q12E 2Q12E 3Q12E 4Q12E FY 2008A 2009A 2010A 2011A Mar-12E Jun-12E Sep-12E Dec-12E 2012E Assets Cash & Cash Equivalents $55,668 $78,093 $61,279 $35,338 $40,512 $40,116 $39,865 $39,588 $39,588 Account Receivables 26,729 24,906 31,161 25,294 26,367 26,525 26,781 27,328 27,328 Other Current Assets 5,500 6,136 9,604 12,388 12,913 12,991 13,116 13,384 13,384 Inventories 11,659 11,096 8,501 10,881 11,343 11,411 11,521 11,756 11,756 Total Current Assets $99,556 $120,231 $110,545 $83,901 $91,134 $91,043 $91,284 $92,056 $92,056 Investments in Affiliates $3,644 $285 $306 $287 $287 $287 $287 $287 $287 Accounts Receivable Loan Deposits Deferred Income Taxes 6,544 5,653 4,934 5,568 5,568 5,568 5,568 5,568 5,568 Fund for Employee Retirement 2,792 3,606 4,498 4,741 4,997 5,267 5,552 5,852 5,852 Other NCA 1,139 1,771 2,426 7,104 7,104 7,104 7,104 7,104 7,104 Property & Equipment, Net 27,074 39,090 46,148 40,870 41,783 42,605 43,344 44,010 44,010 Goodwill & Intangibles 16,697 14,703 14,481 12,589 12,589 12,589 12,589 12,589 12,589 Total Assets $158,308 $185,897 $183,896 $155,060 $163,463 $164,463 $165,728 $167,465 $167,465 Liabilities and Equity Accounts Payable $11,642 $13,459 $13,087 $9,319 $9,743 $9,809 $9,904 $10,087 $10,087 Deferred Revenues 4,821 5,486 4,614 7,869 8,203 8,252 8,332 8,502 8,502 Credit from banking inst Other Current Liabilites 16,179 20,514 23,551 13,922 14,512 14,600 14,741 15,041 15,041 Total Current Liabilities $32,962 $39,465 $41,350 $31,500 $32,848 $33,051 $33,367 $34,020 $34,020 Long-Term Loans $0 $0 $233 $173 $173 $173 $173 $173 $173 Liabilities for Employee Upon Retirement 4,747 5,457 6,472 6,865 7,236 7,627 8,039 8,473 8,473 Other non-current liabilities ,795 5,795 5,795 5,795 5,795 5,795 Deferred Income Taxes 1,617 1,209 1, Total Liabilities $39,326 $46,131 $49,101 $45,061 $46,816 $47,447 $48,214 $49,343 $49,343 Minority Interest 3,124 3,746 4,392 4,288 4,288 4,288 4,288 4,288 4,288 Capital Notes 5,894 5,894 5, Stockholders Equity 109, , , , , , , , ,835 Total Liabilities and Equity $158,308 $185,897 $183,896 $155,060 $163,463 $164,463 $165,728 $167,465 $167,465 ==> Check Source: Company Data, Oppenheimer & Co. Inc. Estimates. 4

5 Ituran Location & Control Cash Flow Statement FY FY FY FY 1Q12E 2Q12E 3Q12E 4Q12E FY 2008A 2009A 2010A 2011A Mar-12E Jun-12E Sep-12E Dec-12E 2012E Cash Flow from Operations Net Income $14,882 $18,192 $21,015 $25,694 $6,648 $6,817 $6,946 $7,057 $27,468 Plus: Depreciation & Amortization 10,115 12,530 15,876 17,382 4,087 4,178 4,260 4,334 16,860 Funds Flow from Operations 24,997 30,722 36,891 43,076 10,735 10,996 11,206 11,391 44,328 (Inc) Dec in Accounts Receivable 1,218 1,045 (4,669) 7,090 (1,073) (159) (256) (546) (2,034) (Inc) Dec in Other Current Assets (2,704) (1,716) (1,287) 1,173 (525) (78) (125) (268) (996) (Inc) Dec in Inventories 1, (2,046) (462) (68) (110) (235) (875) (Inc) Dec in Deferred Income Taxes (746) (823) Inc (Dec) in Account Payables (1,208) 1,734 (1,229) (4,282) Inc (Dec) in Deferred Revenues (1,047) 631 (1,221) 1, Inc (Dec) in Liabilities for Employees upon Retirement ,608 Inc (Dec) in Other Current Liabilities 3,568 4,063 1,870 (33,823) ,119 Other 811 (740) 1,407 1,344 - (Inc) Dec in Working Capital 2,259 7,004 (3,444) (29,915) (305) Net CF from Operations 27,256 37,726 33,447 13,161 10,430 11,322 11,482 11,471 44,705 Cash Flow from Investing Activities (Inc) Dec in Funds for Employees Retirement (250) (794) (662) (155) (256) (270) (285) (300) (1,111) Capital Expenditure (16,947) (15,698) (18,641) (16,161) (5,000) (5,000) (5,000) (5,000) (20,000) Proceeds from sale of PPE , Loan (369) (389) (322) Purchase of Ingtangible Assets (354) - (85) Proceeds from sale of subsidiary 58, Investment in affiliated company (3,397) - (2,223) - Investment in Marketable Securities (33,211) (34,649) (2,664) Sale of Marketable Securities 13,420 64,486 5,552 (45) Net CF from Investing 17,845 13,062 (17,489) (15,163) (5,256) (5,270) (5,285) (5,300) (21,111) Cash Flow from Financing Activities ST credits, net (2) (316) Long-Term Loans (52) Dividends (29,223) (3,735) (31,621) (21,782) (6,448) (6,448) (6,448) (19,344) Equity Financing/Issuance (24,154) Other (506) - Net Cash Flow from Financing Activities (53,379) (4,051) (31,296) (21,777) - (6,448) (6,448) (6,448) (19,344) Free Cash Flow 10,292 21,340 15,700 (2,607) 5,174 6,052 6,197 6,171 23,594 Effect of Exchange Rate on Cash & Equiv. 5,118 1,590 1,199 (2,162) Net (decr.) incr. in cash (3,160) 48,327 (14,139) (25,942) 5,174 (396) (251) (277) 4,250 Net (decr.) incr. in ST invest. 20,601 (25,902) (2,675) 1 Net (decr.) incr. in cash & ST invest. $17,441 $22,425 ($16,814) ($25,941) $5,174 ($396) ($251) ($277) $4,250 Beginning Cash Balance 38,227 55,668 78,093 61,279 35,338 40,512 40,116 39,865 $35,338 Ending Cash Balance 55,668 78,093 61,279 35,338 $40,512 $40,116 $39,865 $39,588 $39,588 Source: Company Data, Oppenheimer & Co. Inc. Estimates. 5

6 Investment Thesis Ituran is a leading provider of products and services for stolen vehicle recovery (SVR), with a majority share of the Israeli market and a rapidly expanding presence in Brazil. While Israel remains a mature market and is unlikely to grow significantly, Ituran's main growth opportunity lies in Brazil, where it can continue to take share with its competitively superior products and services, participate in Brazil's burgeoning automobile market, and benefit from regulation requiring all new cars to have an anti-theft tracking system installed. We believe Ituran's valuation is attractive given the stability of its business model and prospects for further growth from Brazil. Price Target Calculation We derive our $16 price target by using a 12.3x P/E multiple on our 2012 EPS estimate of $1.31. This is in line with the current S&P multiple and within Ituran's typical forward multiple range of 12-18x. Key Risks to Price Target Key risks to achieving this price target include foreign exchange risk related to Ituran's international operations in emerging economies; a slowdown in demand for vehicle recovery services due to lower incidences of theft, integration risk from potential future mergers and acquisitions; and lack of shareholder power due to significant insider holdings. Important Disclosures and Certifications Analyst Certification - The author certifies that this research report accurately states his/her personal views about the subject securities, which are reflected in the ratings as well as in the substance of this report.the author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Potential Conflicts of Interest: Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. 6

7 Rating and Price Target History for: Ituran Location & Control Ltd. (ITRN) as of /23/09 O:$9 08/13/09 O:$10 11/17/09 O:$15 02/17/10 O:$16 11/22/10 O:$17 03/01/11 O:$18 08/19/11 O:$ Created by BlueMatrix All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories, please write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research Department, Business Manager. Oppenheimer & Co. Inc. Rating System as of January 14th, 2008: Outperform(O) - Stock expected to outperform the S&P 500 within the next months. Perform (P) - Stock expected to perform in line with the S&P 500 within the next months. Underperform (U) - Stock expected to underperform the S&P 500 within the next months. Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflict of interest. Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008: Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector. Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere. Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group. 7

8 Distribution of Ratings/IB Services Firmwide IB Serv/Past 12 Mos. Rating Count Percent Count Percent OUTPERFORM [O] PERFORM [P] UNDERPERFORM [U] Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform. Company Specific Disclosures In the past 12 months Oppenheimer & Co. Inc. or an affiliate has received compensation for non-investment banking services from ITRN. In the past 12 months Oppenheimer & Co. Inc. has provided non-investment banking, securities-related services for ITRN. Oppenheimer & Co. Inc. makes a market in the securities of ITRN. Additional Information Available Please log on to or write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research Department, Business Manager. Other Disclosures This report is issued and approved for distribution by Oppenheimer & Co. Inc. Oppenheimer & Co. Inc transacts Business on all Principal Exchanges and Member SIPC. This report is provided, for informational purposes only, to institutional and retail investor clients of Oppenheimer & Co. Inc. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor.oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report.past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize 8

9 losses on investments in such securities, including the loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to Oppenheimer & Co. Inc.All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co. Inc. or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice.nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.this report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright Oppenheimer & Co. Inc