Wednesday, May 18, 2011

Perennial net-net Audiovox

Audiovox (VOXX.Nasdaq)

Trading at $7.70 (5/18/2011)

Often when searching for net-net's in the US one name keeps reappearing in the lists, that's Audiovox.  Audiovox has been mentioned a number of times by Jonathan Heller at Cheap Stocks, and in an interview he did with Geoff Gannon for the Investors Question podcast Jonathan proclaimed that Audiovox might be a permanent net-net.  This isn't the most reassuring thing to hear as an investor in Audiovox, I've held them for about a year now and with their annual report recently released I thought I'd revisit them again.

To give a little background on Audiovox back in 2005 they were a cell phone manufacturer with $1.8b in sales yearly.  They sold off their cell phone division and decided to reinvent themselves in the accessory business.  Since moving into accessories margins and revenue have climbed steadily.

In addition to Audiovox being a net-net they are a rare beast in that they are a profitable as well.  When examining most net-net's I will evaluate the balance sheet, and bolt on earnings power.  I don't think that sort of valuation applies in Audiovox's case, so I'm going to take a look at the balance sheet, then their earning power separately.

Asset Valuation

Here is the net-net template for Audiovox


The first thing that stands out is that the company's balance sheet is made up mostly of inventory and receivables.  While receivables and inventory are a large percentage of ncav they've remained fairly steady for the past five years, and carrying large balances isn't uncommon in the industry.

On an asset basis Audiovox is trading about 30% ncav and about 10% above discounted net working capital.  This is a nice discount but nothing to write home about.  On an asset basis Audiovox isn't the most compelling net-net I've ever seen.

Earnings Valuation

I think the earnings aspect of Audiovox is the most compelling aspect of this investment, and it seems the earnings picture is getting a bit stronger.  In fiscal year 2010 the company earned $1 per share, and is trading at a P/E of 7.7.  The company also had CFO of $1.40 per share which puts them at a P/CF of 5.5.  Both of these are low metrics especially given that the company is on the mend with regards to earnings.

While sales grew 2% from 2010 to 2011 cash from operations grew 35% and capex shrunk 40%.  Free cash flow defined as CFO minus capex is $1.26 a share.

While I usually don't put much weight on management forecasts because no one can know the future the forecast for Audiovox is intriguing.  They acquired Klipsch a car audio manufacturer at the beginning of March for cash and some debt.  Management has stated that Klipsch will be accretive to earnings immediately and help boost revenue by 29%.  Management also expects EBITDA to be $42m up from $10.7m in 2010.


So what do we have, a company trading at a slight discount to ncav and an improving earnings picture.  All seems great right, well there are always risks involved.

Risks
-The company has been trading at a discount to ncav for the past few years, the market hasn't recognized it's value then, it might never recognize intrinsic value.
-The acquisition of Klipsch could destroy shareholder value and leave the company saddled with debt.
-Audiovox has a long history of rolling out products like FLO TV that fail in the marketplace, maybe the discount to ncav is warranted with the lack of product execution.
-It might be hard to realize the full ncav in a liquidation, inventory could be junk, and receivables might pay up at a discount.

Summary

I'm not really sure how to fully value Audiovox, I am taking a 50% discount to ncav or basically cash value and then applying an earnings multiple, here are a few scenarios.

$5.38 ncav +
10x earnings = $10 + $5.38 = $15.38
10x CFO = $14 + $5.38 = $19.38
15x FCF = $18.9 + $5.38 = $24.38

I'm not sure if any of these values will be realized, but I'd be happy with even the worst case.  As with all investments time will tell.

Talk to Nate about Audiovox

Disclosure: Long VOXX

4 comments:

  1. Nate,

    I like your blog and just want to give you a heads up that Audiovox just used all their cash to purchase intangibles one day after the 4th quarter.The Chairman attitude wasn't friendly to the analyst who asked regarding the transaction.

    Please read Barel Karsan article here: http://www.barelkarsan.com/2011/05/audiovox-material-notes.html

    http://www.frankvoisin.com/2011/04/10/qotd-ill-ask-the-questions-around-here-voxx/

    I would stay away from this management.
    Thanks
    James

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  2. Can you give me more details as for why you can potentially expect a 15x FCF - why 15x? Thanks!

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  3. James,

    Thanks, I actually was aware of the transaction, and it's an interesting turn. The acquisition was actually part of the reason I focused my post on the earnings power verses the asset quality. I also read Saj's article and he seems to miss the point.
    I'm not sure the characterization of wasting their cash to purchase intangibles is completely accurate. They purchased a viable audio brand. Even though the purchase will be classified as goodwill the goodwill will be generating close to $35m in EBITDA in 2011. I'm not sure if the acquisition will work out or not, but if management can execute at the $45m EBITDA level next year I will be a happy shareholder.
    All that said I think most of the net-net thesis is dead or dying, and it's more of a cheap business thesis.
    I'll say this as well, that while the quote from management is a bit shady if you think it over they could prove to be correct. First off I think buybacks are a waste of money, analysts love them. A dividend could have been good, but if they had the choice of a dividend and the acquisition and Klipsch turns out as well as expected I'd rather have the acquisition.
    Thanks for the comment!

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  4. Charles,

    I used the 15x multiple based off the fact that the market has historically traded at 15x operating earnings. Instead of operating earnings I used FCF which is a slightly smaller number and is a bit more conservative.
    With that said there is a caveat, 15x is the market average, some industries trade at lower or higher multiples. I think for Audiovox 15x FCF is the best case with a well run capable company, I'm not sure Audiovox qualifies on that front.

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