Good value in VOXX International

DISCLOSURE:

I am long this stock. I am not employed by or consult with the issuer of this security.

Recommendation

• VOXX International’s current share price represents a short term buying opportunity due to an overreaction in the stock market as a result of its FY 2013 goodwill impairment.
• A conservative DCF indicates an intrinsic value of $11.82 per share.
• The bulk of the goodwill & intangible asset impairment have been accounted for now according to management.

BUSINESS OVERVIEW

VOXX is a manufacturer and distributor in the automotive, premium audio and consumer accessories industries. The company has 30 global brands divided into three segments:

1. Automotive: The Automotive segment focuses on in car entertainment, security amongst other items. This segment represents 51% of FY 2013 gross margin.
2. Premium Audio: focuses on home theatre and other entertainment products. This segment represents 26% of FY 2013 gross margin.
3. Consumer accessories: focuses on remote controls; battery packs; amongst other items. This segment represents 22% of FY 2013 gross margin.

The gross margin of the company has been steady ranging from 28.3% to 28.7% in the last three years. Revenue & gross margin contracted in FY 2013 by about 2.78%. This was due to weakness in both the Premium Audio & Consumer Accessories segments as a result of poor weather conditions in the US along with slow European sales.

In addition to the above, the following should be noted

• The company’s balance sheet has a positive current ratio and long term ratio.
• A continued focus on increasing margins has been emphasised by the management in a June 19th 2014 presentation, however this will likely take over a year to impact the financials. The management is aiming for 29% gross margins.
• John J. Shalam, founded Audiovox Corporation (now VOXX International Corp) in 1965 and is Chairman of the Board since May 2005. He was the President and CEO from 1960 through May 2005. John owns about 55% of the combined voting power of both classes of common stock.
• Management has the authority to buy back 1.7MM shares.
• The debt/equity is 0.25.

VOXX SHARE PRICE & 2013 IMPAIREMENT CHARGE

FY 2013 saw a sharp decline in income due to a $57.5MM impairment charge to goodwill, amortizing & non-amortizing assets. This was done due to poor performance in product lines in their consumer electronics & premium audio product lines.

As a result of the impairment, the share price fell precipitously on May 31st 2014 from a price of $13.91 to a low of $7.87.

According to a presentation by the management in a presentation on June 19 2014, there are no other significant impairments expected.

VALUATION

A conservative approach should be used to value VOXX in order to make sure there is an adequate margin of safety if any investment is taken. As a result the following inputs were used:

1. An 11% discount rate.
2. Assumed no growth in free cash flows from the company in the next 10 years or in perpetuity.
3. Have not included the value of the $11MM in cash the company holds on the balance sheet.
4. The free cash flow number used for Year 1 is the average of the last 5 years of FCF (that average is $31.2MM).

The results of this DCF calculation analysis leads to an intrinsic value of $11.82 per share.

On the left is a table showing the quarterly results of VOXX by year. It is important to note that the adjusted EBITDA for FY 2014 is projected by VOXX to be $54MM while FY 2013 adj EBITDA was $46.5MM and FY 2012 was $67.4 MM. Analysts estimates for FY 2014 are on average $0.75 per share which is roughly in line with VOXX’s projections based on forecasted adj EBITDA.

At the current price level and the projected $0.75 per share for FY 2014, the PE is 11.88. This is noteworthy due to the fact that the peak PE in 2013 was 13.9 and in 2012 was 14.6. As a result ‘once the dust settles’ from the recent impairment in good will one could see multiple expansion.

SUMMARY

• VOXX International is undervalued given a conservative DCF valuation.
• Management is clearly taking initiative to improve margins including entering growing markets such as the ‘Action Camera’ space to compete with GoPro
• ROE & ROIC are on the low end for this company which is not positive.
• Management has advised that they take into account past years of poor performance in a product lines before taking a write down on the balance sheet on their good will and intangible asset account and as a result are confident that the bulk of the write downs of these assets are behind them.
• Q3 & Q4 could be catalysts as they are typically the strongest due to the seasonality of the business, these quarters are reported in November & February.
• DISCLAIMER: THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE SEEN AS INVESTMENT ADVICE. NOTHING WRITTEN IN THIS REPORT SHOULD BE CONSIDERED TO BE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY ANY SECURITY. THE INFORMATION IN THIS REPORT WAS CURRENT WHEN THE REPORT WAS WRITTEN BUT MAY BE OUTDATED WHEN BEING REVIEWED. ANY INDIVIDUAL OR FIRM SHOULD CONSULT A PROFESSIONAL OR DO THEIR OWN RESEARCH BEFORE MAKING ANY INVESTMENTS. AUTHOR IS NOT RESPONSIBLE OR LIABLE FOR THE SUCCESS OR FAILURE OF THIS INVESTMENT AND EVERYONE MUST DO THEIR OWN RESEARCH.