[Member] AudioVox – A Net-Net in Search of Moat – Part 1

This is a past Premium recommendation and is made available for your reference. For more past trades, refer to our trade history.
Sometimes, stocks can remain undervalued for long periods and need a catalyst to unlock the value.

Audiovox Quick Facts

  • Ticker VOXX
  • Markets mobile & consumer electronics products
  • International operations in Europe, Asia, Venezuela & Mexico
  • Original Equipment supplier to automotive
  • Mobile Entertainment: rear seat entertainment systems, mobile multimedia systems, satellite radio, vehicle security, remote start, collision avoidance
  • Consumer Electronics: digital camcorders, DVRs, internet radio, high-end TV remote controls, wireless speakers, headphones, antennas, sound amplifiers
  • Domestic Brands: Audiovox, RCA, Jensen, Acoustic Research, Advent
  • European brands: Magnat, Mac Audio, Heco, Schweiger, Oehlbach
  • Most recent acquisition: Klipsch

On Feb 28, 2011, AudioVox was a net-net stock. Which means, its current assets minus TOTAL Liabilities exceeded its market capitalization. Think of it this way, an enterprising investor with capital could buy out the company and use its cash, short term investments, receivables, etc to pay down all the debt and have money left over. The investor will also have the long term assets (plant, property, trademarks, etc) left over as a bonus that he can sell at his leisure.

Consider the Fiscal Year 2010 Balance Sheet

Assets

Cash & Short Term Investments: $108 M

Accounts Receivable: $116.4 M

Inventories: $113.6 M

Other Current Assets: $12 M

Total Current Assets: $340.8 M

Long Term Assets (such as Plant, Property and Equipment, net of depreciation and amortization, goodwill and intangibles): $160.3 M

Total Assets: $501.1 M

Liabilities on the other hand were pretty light

Liabilities

Current Liabilities (includes account payables, current debt, income taxes payable, etc): $82.3 M

Long Term Liabilities (long term debt, deferred taxes, etc): $25.8 M

Total Debt: $108.2 M

In this case the Net Current Asset Value (NCAV) is Current Assets – Total Liabilities = $340.8 – $108.2 = $232.6 M

As of Market close on June 9, the total market capitalization of Audiovox is $166.59 M

In other words, buying Audiovox in its entirety will require us to spend $167M and will net us $233 – $167 = $66 M in profits in essentially a risk-free transaction!

And the long term assets are just gravy (even if you ignore goodwill and intangibles, there is about $33 M in Plant, property and equipment and other investments on the books, that are bound to be worth something in liquidation).

Is the Business Profitable and Creating Value?

One might reasonably think that the stock is so undervalued because the management might be destroying the value in the company. Let’s therefore take a look at the Income Statement (simplified and summarized to show key items) and the cash flow for the company in the past 4 years.

Period Ending($millions) 2/28/2011 2/28/2010 2/28/2009 2/28/2008
Revenue 561.67 550.70 603.10 591.36
Gross Profit 131.8 114.45 107.56 117.08
EBITDA 16.88 11.45 (7.34) 10.17
Income Taxes (10.54) (11.33) 15.08 3.85
Net Income 23.03 22.48 (71.03) 8.47
Cash Flow 30.90 30.18 (63.74) 14.22
Free Cash Flow 29.02 8.90 25.37 (114.35)

A casual inspection of the table above shows that while the earnings have been volatile over the years the company has been generating profits and positive cash flow in the most recent years.

Bottom line is that even if the business keeps prodding along with very little profits in the future years the value sitting on its balance sheet, as of Feb 28, 2011, makes it a compelling purchase.

Of course, this is all predicated on the management not doing anything stupid, like going out and buying another company out at a premium :-)

Audiovox is Not a Net-Net Stock as of Mar 1 2011

The company closed an acquisition of Klipsch on Mar 1, 2011, adding a high end loud speaker brand to their portfolio. This acquisition almost certainly wiped out the cash assets on the balance sheet, not to mention the company funded part of the acquisition with additional debt. While the company has only released very few details of the terms of the acquisition, we do have some data to start figuring out if the company still remains an attractive stock post acquisition.

In Part 2 I will discuss the Klipsch acquisition and how it affects the valuation of Audiovox. One thing is for certain, by adding Klipsch to its brand portfolio, the company is now trying to build a moat around its what is essentially a commodity business. This competitive moat arises out of the brand value of Klipsch. The question is whether Audiovox paid a just price in acquiring Klipsch or did it overpay and whether the earnings power has increased enough to offset any premium paid quickly. This is an interesting case study of an undervalued company levering up its balance sheet to “buy” growth and profitability. It remains to be seen if this is a “catalyst” that will help the stock realize its true value.

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