Pat McKeough recently replied to a member of his Inner Circle who asked for his view on Vecima Networks. The high U.S. dollar has lifted earnings for the company, says Pat. But growing demand for its broadband technology has also helped.

Q: Pat: Can I have your recommendation on Vecima Networks? Thanks.

A: VECIMA NETWORKS (symbol VCM on Toronto; www.vecima.com) designs and make technology for the broadband equipment market.

Vecima first sold shares to the public in 2005 and began trading on the Toronto exchange at $7.50.

The company’s technology provides a final network segment for service providers, such as cable companies, to connect their systems directly to end-users. This is commonly referred to as “the last mile.”

Due to regulatory requirements, all North American cable operators are completely turning off their analog television broadcasts. However, there are still many cable subscribers who can only get analog signals, and Vecima’s main products address this market.

For example, the company’s Terrace products let cable operators convert their digital video signals into the older analog signals. These products are commonly used in apartment buildings and other multi-room buildings. The Terrace QAM line of products lets cable operators with customers in the hospitality industry, such as hotels, distribute multiple high-definition video signals to many rooms without the use of digital set-top boxes in each room.

Growth stocks: Contigo purchase adds recurring revenue

Vecima also has two other businesses:

YourLink operates four small cable television systems in British Columbia and provides wireless broadband Internet service in Saskatchewan and British Columbia. As at December 31, 2015, these systems provided video services and/or broadband Internet access to 15,878 subscribers.

FleetLynx makes GPS systems to dispatch and track trucking fleets, including oil and gas fracking trucks, oil tankers, pickup trucks and other vehicles.

Vecima just announced its purchase of Contigo Systems Inc., a Vancouver-based private company. Contigo provides GPS systems for fleet management, asset tracking and personal safety for small- to medium-sized fleets.

Contigo provides several devices whose location can be tracked as well as a state-of-the-art web platform. The company’s two main products are RideAlong, for commercial vehicle tracking, and Alert & Assist, for lone worker safety. Contigo’s revenue is about $5.0 million annually from over 15,000 subscribers. More than 90% of that revenue is recurring. Contigo should complement Vecima’s FleetLynx business.

In the three months ended December 31, 2015, Vecima’s revenue rose 16.7%, to $27.7 million from $23.7 million a year earlier. Earnings jumped 70.6%, to $6.5 million, or $0.29 a share, from $3.7 million, or $0.17. The company does 77% of its business in the U.S. and the high U.S. dollar has increased the value of sales in that country. The growing demand for higher-profit-margin Terrace products has also lifted earnings.

Vecima holds a high cash balance of $71.9 million, or $3.21 a share. It has low debt. The company spends a high 9% of its sales on research and development.

The stock trades at 11.4 times this year’s forecast earnings per share of $1.03. The shares yield 1.9%.

Inner Circle recommendation: HOLD for aggressive investors.

For our report on how to uncover tech stocks with growth ahead, read How to identify hidden value in growth tech stocks.