AUDIOVOX CORP -CL A VOXX
May 17, 2010 - 6:33pm EST by
backinthetetons34
2010 2011
Price: 9.35 EPS -$3.11 $0.98
Shares Out. (in M): 24 P/E na 9.5x
Market Cap (in $M): 226 P/FCF 8.9x 9.8x
Net Debt (in $M): -55 EBIT -53 4
TEV ($): 171 TEV/EBIT 0.0x 45.6x

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Description

What would you be willing to pay for a company with the "#1 market share in universal remote controls" and "#1 market share in TV reception & antennas"?  20 times earnings seem like a steal?  What if I told you the same company was "#3 in Clock Radios", "#3 in Digital Voice Recorders" and "#6 in MP3 Players"?  If Best Buy is out of the Ipod and Zune and you cannot locate an old portable CD player or walkman, and also cannot find a radio, guess who might benefit?  Would 50 times earnings be too euphoric?  What if I told you that the same company claims "#1 Market Share in Mobile Multimedia and Mobile Video", or essentially is the #1 company helping you watch television while driving?  Could any multiple be too expensive for such a dynamic opportunity...?

While I doubt additional information is needed prior to purchase given the introduction, for those discriminating buyers I present the following quick write up.  Every security is an investment at some price -

Audiovox ("VOXX") has not been written up on VIC since August 2002, but is likely somewhat familiar to VIC members as the company has remained a (near) "net-net" opportunity for much of the past few years and appears on a number of "popular" 13Fs - Baupost Group and Kahn Brothers are among notable shareholders, each owning roughly 9% of the company.  I have owned the company twice during the past 18 months, liquidating my holdings each time the company approached my hypothetical liquidation value.  I thought I would write up the company to organize my thoughts, as well as see if other VIC members have an opinion. After review of the 10-K this weekend, it would appear that perhaps the company has progressed from a "net-net" opportunity (i.e. to be viewed from a worst-case scenario) to a firm which should at least be valued at approximately tangible book value.

Given that my focus is almost entirely upon the balance sheet, I have omitted a description or discussion of the qualitative aspects of the business.  For those interested, see the first roughly 9 pages of the recently filed 10-K at www.sec.gov.  Given that this admittedly leaves much to be desired, it might be worthwhile to view their IR page at http://www2.audiovox.com/corporate/corp_stock.do.

Tangible Book Value

As of February 28, 2010, tangible book value stood $259,648.  There are a total of 22,884 class A and B shares outstanding, plus an additional 1,316 class A options outstanding and exercisable, bringing (diluted) tangible book value per share to approximately $10.73 per share.  This is roughly 14.76% above today's closing price of $9.35 (note that when I began writing this morning, the share price was $8.80 or so). 

Additionally, there exists a valuation allowance of $24,349 or roughly $1.01 per diluted share.  During the year ended February 28, 2010, due to profitability, the company reduced this valuation allowance a total of $10,661 as the company was able to utilize (primarily) NOLs to offset taxable income - they actually received a refund.  Adding the $24,349 would bring tangible book value to $11.74 or 25.56% above today's closing price.

Although a seemingly aggressive adjustment, there exists $34,748 in "reserves" that have been "netted" from the balance sheet, but of course are still in the company's possession.  These consist of $6,386 in allowance for doubtful accounts, $275 in cash discount allowances, $10,768 in accrued sales incentives, and $17,319 in reserve for warranties and product repair costs.  Total reserves would add $1.44 per share and bring hypothetical tangible book value to $13.18 or 40.96% above the closing price of $9.35.  Again, this is an aggressive adjustment, but it may be reasonable based upon the past to expect some small value to ultimately be derived from these "reserves".

Note that book value (including intangibles) was stated at $15.05 as of February 28, 2010.  Working capital per share equaled $9.91 per share at February 28, 2010. 

Earnings in relation to the balance sheet

Note that with a return to profitability in fiscal 2010, the company increased retained earnings by $22,483 or roughly $0.93 per share (based on the 24,200 shares outstanding presented above).  Roughly half of this amount is attributable to an income tax benefit of $11,328.

Cash Flow

The company produced $30,953 in cash flow from operations before changes in WC in fiscal 2010.  Including investment in working capital, CFO was $28,222 in fiscal 2010 following the $30,006 level in fiscal 2009 during which WC was liquidated to adjust to reduced demand.

Free cash flow in fiscal 2010 was $23,205.  Based on this number, FCF/MC equals 10.26% and FCF/EV equals 13.53%.  FCF was at a similar level (+$25,512) in fiscal 2009.  Fiscal 2008 produced FCF of ($71,923), as the company made "ill-timed" investment in working capital prior to the dramatic slowdown. 

I have absolutely no idea about the future cash flow generation capabilities of the company given their "gimmicky" product portfolio.  They appear to have a number of new products that perhaps have commercial viability (e.g. FLO-TV), but it remains to be seen how these will be accepted.  That being said, given the realignment of their business and cost-cutting initiatives, I would be surprised if the business burns through a material amount of cash whatever the outcome.

Liquidation value

Although I would typically go into more detail and discount A/R and Inventory, remove prepaid expenses, adjust for operating leases, etc. for simplicity and to save time I will simply assume that an orderly liquidation of non-current assets would cover any shortfall from the stated value of current assets.  With current assets of $332,326 and total liabilities of $124,715, the remaining "equity" would be $207,611 or approximately $8.58 per share.  This is 8.24% below today's closing price.

Conclusion

It would seem that if the company can roughly duplicate the results in fiscal 2010, that a share price roughly equivalent to $12.00 should not be too much too expect.  If the company continues to generate profits like those generated in fiscal 2010, tangible book value would be expected to grow approximately $0.50 per year (excludes effect of NOLs, which are of course included in the $12.00).  A share price of $12.50 would represent an increase of 33.69% from today's close.  Given that hypothetical liquidation value is roughly 8.24% below current market price, it would seem that the probability of material loss is small.

Situations such as this (discount to tangible book value, at or below liquidation value, etc.) are ideal.  Although they typically require patience, as earnings or cash flow are unlikely to provide a quick catalyst, the balance sheet provides the necessary confidence when opportunities are presented via a decline in market price. 

Risks

  • Economy deteriorates impacting sales and profitability
  •      - I expect the economy to deteriorate but have little insight into how this directly affects sales and profitability of VOXX. They, as did most companies, eliminated a considerable amount of overhead in late 2008 and into 2009 and should be a leaner company going forward.

Catalyst

  • Continued profitability and increasing BVPS
  • Additional product launches
  • Company is acquired 
  •     - Given that the class B shares would be able to vote down any potential suitor, this is clearly a long shot and is dependent upon the majority shareholder accepting any offer.
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    Description

    What would you be willing to pay for a company with the "#1 market share in universal remote controls" and "#1 market share in TV reception & antennas"?  20 times earnings seem like a steal?  What if I told you the same company was "#3 in Clock Radios", "#3 in Digital Voice Recorders" and "#6 in MP3 Players"?  If Best Buy is out of the Ipod and Zune and you cannot locate an old portable CD player or walkman, and also cannot find a radio, guess who might benefit?  Would 50 times earnings be too euphoric?  What if I told you that the same company claims "#1 Market Share in Mobile Multimedia and Mobile Video", or essentially is the #1 company helping you watch television while driving?  Could any multiple be too expensive for such a dynamic opportunity...?

    While I doubt additional information is needed prior to purchase given the introduction, for those discriminating buyers I present the following quick write up.  Every security is an investment at some price -

    Audiovox ("VOXX") has not been written up on VIC since August 2002, but is likely somewhat familiar to VIC members as the company has remained a (near) "net-net" opportunity for much of the past few years and appears on a number of "popular" 13Fs - Baupost Group and Kahn Brothers are among notable shareholders, each owning roughly 9% of the company.  I have owned the company twice during the past 18 months, liquidating my holdings each time the company approached my hypothetical liquidation value.  I thought I would write up the company to organize my thoughts, as well as see if other VIC members have an opinion. After review of the 10-K this weekend, it would appear that perhaps the company has progressed from a "net-net" opportunity (i.e. to be viewed from a worst-case scenario) to a firm which should at least be valued at approximately tangible book value.

    Given that my focus is almost entirely upon the balance sheet, I have omitted a description or discussion of the qualitative aspects of the business.  For those interested, see the first roughly 9 pages of the recently filed 10-K at www.sec.gov.  Given that this admittedly leaves much to be desired, it might be worthwhile to view their IR page at http://www2.audiovox.com/corporate/corp_stock.do.

    Tangible Book Value

    As of February 28, 2010, tangible book value stood $259,648.  There are a total of 22,884 class A and B shares outstanding, plus an additional 1,316 class A options outstanding and exercisable, bringing (diluted) tangible book value per share to approximately $10.73 per share.  This is roughly 14.76% above today's closing price of $9.35 (note that when I began writing this morning, the share price was $8.80 or so). 

    Additionally, there exists a valuation allowance of $24,349 or roughly $1.01 per diluted share.  During the year ended February 28, 2010, due to profitability, the company reduced this valuation allowance a total of $10,661 as the company was able to utilize (primarily) NOLs to offset taxable income - they actually received a refund.  Adding the $24,349 would bring tangible book value to $11.74 or 25.56% above today's closing price.

    Although a seemingly aggressive adjustment, there exists $34,748 in "reserves" that have been "netted" from the balance sheet, but of course are still in the company's possession.  These consist of $6,386 in allowance for doubtful accounts, $275 in cash discount allowances, $10,768 in accrued sales incentives, and $17,319 in reserve for warranties and product repair costs.  Total reserves would add $1.44 per share and bring hypothetical tangible book value to $13.18 or 40.96% above the closing price of $9.35.  Again, this is an aggressive adjustment, but it may be reasonable based upon the past to expect some small value to ultimately be derived from these "reserves".

    Note that book value (including intangibles) was stated at $15.05 as of February 28, 2010.  Working capital per share equaled $9.91 per share at February 28, 2010. 

    Earnings in relation to the balance sheet

    Note that with a return to profitability in fiscal 2010, the company increased retained earnings by $22,483 or roughly $0.93 per share (based on the 24,200 shares outstanding presented above).  Roughly half of this amount is attributable to an income tax benefit of $11,328.

    Cash Flow

    The company produced $30,953 in cash flow from operations before changes in WC in fiscal 2010.  Including investment in working capital, CFO was $28,222 in fiscal 2010 following the $30,006 level in fiscal 2009 during which WC was liquidated to adjust to reduced demand.

    Free cash flow in fiscal 2010 was $23,205.  Based on this number, FCF/MC equals 10.26% and FCF/EV equals 13.53%.  FCF was at a similar level (+$25,512) in fiscal 2009.  Fiscal 2008 produced FCF of ($71,923), as the company made "ill-timed" investment in working capital prior to the dramatic slowdown. 

    I have absolutely no idea about the future cash flow generation capabilities of the company given their "gimmicky" product portfolio.  They appear to have a number of new products that perhaps have commercial viability (e.g. FLO-TV), but it remains to be seen how these will be accepted.  That being said, given the realignment of their business and cost-cutting initiatives, I would be surprised if the business burns through a material amount of cash whatever the outcome.

    Liquidation value

    Although I would typically go into more detail and discount A/R and Inventory, remove prepaid expenses, adjust for operating leases, etc. for simplicity and to save time I will simply assume that an orderly liquidation of non-current assets would cover any shortfall from the stated value of current assets.  With current assets of $332,326 and total liabilities of $124,715, the remaining "equity" would be $207,611 or approximately $8.58 per share.  This is 8.24% below today's closing price.

    Conclusion

    It would seem that if the company can roughly duplicate the results in fiscal 2010, that a share price roughly equivalent to $12.00 should not be too much too expect.  If the company continues to generate profits like those generated in fiscal 2010, tangible book value would be expected to grow approximately $0.50 per year (excludes effect of NOLs, which are of course included in the $12.00).  A share price of $12.50 would represent an increase of 33.69% from today's close.  Given that hypothetical liquidation value is roughly 8.24% below current market price, it would seem that the probability of material loss is small.

    Situations such as this (discount to tangible book value, at or below liquidation value, etc.) are ideal.  Although they typically require patience, as earnings or cash flow are unlikely to provide a quick catalyst, the balance sheet provides the necessary confidence when opportunities are presented via a decline in market price. 

    Risks

    Catalyst

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