Elle Investments Research Report: VOXX
Company: VOXX International Corporation
Analysis Date: 9/23/19
Analysis Price: $5.03
Price Target (PT): $10.00
VOXX: 1-Year Chart
Source: Seeking Alpha
A sum-of-the-parts analysis shows VOXX to be clearly undervalued. VOXX has an incredibly strong balance sheet and exciting products across all segments. However, investors are not yet convinced that the recently announced new employment agreements go far enough in aligning the interests of shareholders to management, given the multi-year underperformance of the stock. Still, we think the net assets per share limit the downside, and this makes VOXX a Buy.
LIQUIDITY POSITION: Excellent
As of 1QFY20 (ended May 31), VOXX had cash and cash equivalents of $60M. One June 12, they announced the sale of their German Accessories Business for $19M. Additionally, when they released earnings on July 10 they also disclosed that they had sold some real estate in Germany a few days earlier for $12M. Including these two transactions brings the total cash balance to $91M as of July 10. Given that they are expecting to return to profitability for 2HFY20, and that total debt is only $15M, their liquidity position is excellent.
Furthermore, with total current assets (as of July 10) coming to $267M and total liabilities coming to $106M, we calculate net assets (excluding non-current assets) to be $161M. Using the most recent diluted share count of 24.4M gives net assets per share of $6.60, which we think offers some level of support for the stock.
VOXX: Net Assets Per Share (Excluding Non-Current Assets) ($M)
Source: Elle Investments, Company filings
COMMERCIAL PROSPECTS: Good
VOXX’s reportable segments are:
Automotive Electronics: This segment offers products to both Original Equipment Manufacturers (OEMs) as well as aftermarket customers. Along with products ranging from advanced security to remote start, perhaps their most innovative and popular product is their EVO rear-seat infotainment system. Quarterly revenues in this segment can be lumpy due to the timing of when certain car models that carry their products start and stop production, but usually come in at about $30M+/quarter.
Consumer Electronics: This segment was created recently in May 2019 when they combined the Accessories and Premium Audio segments. The products offered in this segment include audio, reception, karaoke, and other electronic accessories, and are sold under the brands of Klipsch, RCA, Mac Audio, etc. Revenues tend to be about $60M/quarter and are showing modest YOY growth.
Biometrics: This segment has some very interesting products in the pipeline, such as a body cam with live 4G streaming that management expects to be the future standard for law enforcement. What deserves the most immediate attention, however, is their majority-owned subsidiary EyeLock, which is perhaps the leader in iris-recognition technology. While fingerprint, voice, and facial recognition are all in use today, management believes that iris authentication will win out due to its accuracy and reliability compared with the other forms of biometric security. Some early trials for EyeLock have been discussed on the earnings calls for some time, but so far revenues from this segment are immaterial.
We think the biggest risk to an investment in VOXX is the apparent indifference of management towards the share price. While each share of Class A common stock is entitled to one vote, each share of Class B common stock is entitled to ten votes. As of May 31, holders of the Class B common stock controlled over 50% of the voting power.
VOXX: Class B Common Stock Shareholders Voting Power
Source: Elle Investments, 1QFY20 10-Q
As we can see from the proxy statement filed on June 6, 2019 (see pg 13), Mr. John Shalam (Chairman of the Board) and his son Ari Shalam (Director) own all of the Class B common stock.
VOXX: Class B Common Stock Shareholders (as of May 28)
Source: DEF 14A (filed 6/6/19)
Along with 1QFY20 earnings, they did announce some changes to management compensation aimed at further aligning executive interests with shareholders. For President and CEO Mr. Patrick Lavelle to receive at least $1M of the potential $5M in stock compensation, the new compensation agreement at least sets a somewhat high stock price target of $10.00/share (see Schedule A of Exhibit 10.1 filed with the July 12 8-K).
VOXX: Stock Price Targets For CEO’s New Compensation Agreement
Source: Ex 10.1 (filed with 7/12/19 8-K)
The frustration that analysts have with the disconnect between the assets of the company and the stock price performance over the past few years has been on full display during the past few earnings calls. Analysts have continuously pleaded with management to utilize excess cash to buy back a significant amount of shares at such depressed prices or institute a dividend. Thus far, investors seem unmoved by the new compensation agreements, given that the CEO’s base salary continues to be $1M per year. It’s unclear at this time whether the new stock price targets will reverse management’s past indifference to the stock performance. But this remains our biggest concern.
We continue to be frustrated by the persistent underperformance of VOXX’s stock relative to value we see in its holdings. While we think the downside is limited due to the “floor” created by the net assets/share, we are not entirely confident that the new compensation agreements go far enough in motivating management to concern themselves with the stock price. But the solid cash position, along with the innovative products in the Automotive Electronics and Biometrics segments make this deserving of a position. We think VOXX is a Buy.
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Published By: Elle Investments Research Team
Phone: (914) 715-8066
Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.