Iteris, Inc (ITI) has been a Value Uncovered holding since March, and just announced results for its fiscal first quarter ending on June 30, 2010. .

Iteris sells traffic management technology and services to the trucking industry, a tough business to be in during 2008 and 2009. Encouragingly, the past two quarters continue to show positive signs of a turnaround.

Sales Highlights

Sales increased 7.1% from the same quarter last year, driven by substantial increases in the company’s main product segments – a 30.9% increase in Roadway Sensors and 67.2% increase in Vehicle Sensors.

These increases followed double-digit revenue growth in the previous quarter, a very positive sign.

Transportation Systems (contract) revenue continued to decrease, but at a much slower pace than last quarter.

Overall, I believe product revenues are much more important indicators for the company’s future outlook.

Margins & Income

Overall, gross margins increased 6.7% to 44.8%, much closer to the company’s long-term average.

Net income increased over 450% for the quarter, jumping to $797k from $144k in the previous quarter.

I will be watching the cash flow numbers closely after the 10-Q is filed, but I estimate quarterly owner earnings to be around $0.8M, a substantial increase from the same time last year.

CEO Remarks

“I am encouraged with our financial performance for the quarter, and believe we are beginning to see the positive impact of the initiatives we put in place during the last year, such as expansion of our R&D efforts and an increase in sales and marketing activities…This quarter reinforces my confidence that we are on the right path.”

Business Outlook

Management seems very bullish on the business going forward. The company continues to invest in new product lines, expanding the scope and breadth of its offerings.

The balance sheet is solid with $11.7m in cash plus an untouched $12m line of credit.

ITI was not able to utilize its NOLs in 2010 due to deteriorating conditions and uncertainty over future profits.  Since the business outlook seems to have improved substantially, some of these tax assets should be realized in fiscal 2011.

Valuation

I will revisit my valuation assumptions at the halfway mark of the year, but by most any measure, Iteris appears extremely cheap – ITI was recently profiled at Old School Value as well.

Even using the recession-depressed numbers from 2009, the company seems to be worth a little over $2. If conditions continue to improve, I think the stock could rise closer to $4.

Despite the seemingly positive report, ITI’s stock price has dipped, providing a nice buying opportunity.

Disclosure

Long ITI

To give some background on my investing decisions, I’ve included a sampling of my recent stock writeups:

CHDN / UBET – Churchill Downs & Youbet Merger – My first ‘special situation’ investment of the year, a merger arbitrage play. Still offering a 13% spread for a merger that will likely close in the next few weeks, although it has ran a bit the date I estimated for. Already received shareholder approval, both management teams are committed to making it work, and CHDN has sold off the necessary businesses – just need final approval from regulators.

TPCS – Techprecision Corp – A growth stock with potential that is too hard to ignore. Heavy dependence on the solar market. Stock took a huge hit after its largest customer, GT Solar, canceled a multi-million dollar order last year. Recent filings show the return of GT Solar’s business, and the company is trying to diversify and take advantage of other macro trends in medical devices and nuclear power. Cheap even if the other growth prospects don’t materialize. Value: $2 or more.

APNC – Access Plans, Inc – Went through a major acquisition last year that more than doubled the size of the company. Alternative insurance-like products in high demand as people lose their jobs and cancel traditional medical insurance. Market does not seem to be pricing in the potential of the combined entity. Insiders hold 71% of outstanding shares and have been buying more. Value is more than double the current price.

ITI – Iteris, Inc – Strong insider buying back in Feburary. Stock has dropped back after reporting tough Q4 results. Large NOL carryforwards, meaning the company won’t be paying income taxes for a long time. Upside potential once the heavy truck market picks back up and a very neat technology that has real potential. Value: $3 with upside north of $4.50

ADVC – Advant-e Corporation – Small software company with steady revenues throughout the recession. Management is paying out another $.02/share in dividends in 2010 – that’s an easy 12% return. Value: $.30

NOOF – New Frontier Media – Stock is down almost 20% from its March highs on no real news. Insiders were buying up stock at around this price back in late 2009. Large goodwill writedown in 2009 scared many investors away. Outstanding CROIC numbers >50% and very aggressive company repurchase program should drive help drive price upwards. Value: at least $4.

SPAN – Span-America Medical Systems – Company has been paying dividends for 82 consecutive quarters and just paid out a $1 special dividend, a great sign. Average CROIC of 26.5 over the past three years. Owner’s earnings of 5.2m in 2009 was the company’s highest ever despite slow sales during the recession. Value is $25+

ACU – Acme United Corporation – Maker of school supplies has been around since 1867. >5% ownership interest from two institutional investors and insiders hold 26.7% of outstanding stock. 2009 was rough but the company should bounce back and continue to deliver solid income and FCF.  Ultra conservative valuation of $13/share. Under normal growth scenarios, it should be trading between $17-$20.

Disclosure

*Long TPCS, APNC, ITI, ADVC, NOOF, SPAN, ACU, UBET. Short CHDN