Image Sensing Systems ( Nasdaq - ISNS ) -- Not Shovel Ready

Image Sensing Systems (ISNS $8.15) reported lower than expected Q2 results.  The company is the leading provider of machine vision systems used to regulate traffic at intersections.  Those machines also are used in tunnels to spot fires, and along highways to report jam-ups and accidents.  Image Sensing produced stellar performance under its previous management team, which retired a few years ago.  The new line-up has overseen a steady downturn in earnings, albeit under difficult economic conditions.  Two acquisitions have delivered less impetus than projected.  One of those units produces traffic control systems that employ radar to count the vehicles lining up at red lights.  That approach works better in certain lighting conditions.  Image Sensing additionally purchased a license plate reading technology last year.  The company also has invested aggressively to develop international markets, primarily in Asia and Eastern Europe.  None of the initiatives have been especially rewarding to date.  For the quarter income dropped 33% to $.12 a share.  Sales were up 23% to $8.10 million but most of that was accounted for by acquisitions that weren't included in the year ago figure.

U.S. highway construction hasn't picked up as expected.  In every recession since the automobile was invented government spending on transportation infrastructure expanded as a way to boost jobs while getting useful projects completed.  When the Obama Administration took office in 2009 it touted expansive plans to invest in a plethora of "shovel ready" highway projects.  The last three summers have seen little headway, though.  Image Sensing has been facing macro-economic headwinds, as a result, amplifying its internal struggles.  A near term improvement appears unlikely.  We are reducing our 2011 full year earnings estimate 35% to $.55 a share, accordingly.

A new product, developed internally, could restore a bounce in the company's step.  The line is aimed at Image Sensing's core intersection control market.  It combines the company's machine vision and radar technologies into a single package to produce superior results at a reasonable price.  With the error rate virtually eliminated competition should become less significant, helping margins.  Attractive pricing also should help Image Sensing knock out indirect competition provided by loops that are buried under the roadway.  Those systems are cheap but are expensive to install and repair.

The shares are unlikely to do much in the meantime.  The new line is slated for introduction in Q1 of 2012.  If Image Sensing can rehabilitate its foreign business during the interim performance could post dramatic gains next year.  Value investors can realistically maintain positions with an eye towards tripling the stock price within 2-3 years.

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