Fleetmatics Ticks Higher After Morgan Stanley Initiated At Overweight

Morgan Stanley started coverage of FleetMatics Group PLC FLTX with an Overweight rating and $52 price target, implying an upside of 32 percent, saying the market undervalues the company's market opportunity in vehicle utilization and upsell potential.

Fleetmatics offers SaaS-based vehicle fleet management solutions that enable services businesses to improve operational efficiencies. Given the company's focus on small and medium-sized business, investors are skeptical over its ability to grow subscribers while maintaining average revenue per user (ARPU) and profitability.

"[W]e are optimistic on both the market adoption and upsell potential, and therefore we ascribe a premium valuation to what we believe is a currently underappreciated opportunity set," analyst James Faucette wrote in a note.

Faucette highlighted that he sees a significant opportunity in improving vehicle utilization, which the market underappreciates.

"[W]e estimate that commercial vehicles incur over $500 bn annually in mileage costs and wages worldwide, suggesting a large value creation opportunity (a"Utility TAM") through operational savings and improved productivity," Faucette noted.

"Market adoption is still relatively low amongst the roughly 95mm commercial vehicles worldwide, leaving us convinced that there are more than enough wallets and wallet space to drive long-term subscription and ARPU growth," the analyst continued.

Over long term, the company would benefit from continued scale out of its SaaS model with falling hardware costs (most notably with the migration to 3G in-vehicle devices, scheduled to complete in 2016) and upsell opportunities.

In addition, the analyst noted that the company's ARPU would expand when its customers save costs via product portfolio expansion and improved features.

"Our base case assumes mid-teens EPS growth supported by ARPU increasing at a 1% CAGR to ~$41 per month (current MSRP of core REVEAL product) by 2020," Faucette added.

At time of writing, shares of Fleetmatics rose 6.36 percent to $41.99.