The first thing to look for in a long-term investment is the company's ability to weather storms. Companies with strong liquid asset positions relative to debt stand a greater chance of outlasting recessions, and have the ability to steal share and make strategic investments while competitors focus on solvency. (For example, as an aside, LCA Vision (NASDAQ:LCAV) in the Lasik procedure industry can pick and choose its most profitable centres, while competitor TLC Vision (TLCV) must exit businesses to pay off its hounding debt obligations.)
LoJack fares well in this regard, with a cash position over $60 million and a total debt position under $30 million. This allows it to make strategic investments to expand and diversify its business with little in the way of competition. It will soon come out with a product that leverages its existing technology infrastructure to find cargo, as well as mentally ill patients who have wandered off.
But all the liquid assets in the world won't help if a company is burning through its cash. But LoJack has a demonstrated ability to cut costs: despite the massive drop in auto sales, gross margin fell only 3 points from 53% to 50%. As we discussed, since the company farms out the manufacture of these units, these costs are mostly variable, which makes it easier to scale them down to accommodate a drop in sales. Furthermore, the company's fourth quarter modest profit demonstrates it is able to make these strategic investments while still maintaining its cash position!
While LOJN shares are not as cheap as they once were, they nevertheless may still represent great value for those with a long-term outlook.