Elle Investments Research Report: ZAGG
Company: ZAGG Inc
Analysis Date: 7/29/20
Analysis Price: $2.82
Price Target (PT): $9.00
ZAGG: 1-Year Chart
Source: Seeking Alpha
The stock has plummeted from $8.00/share on a combination of the COVID-19 sell-off and the end of the strategic review with no sale of the company. There appears to be consensus among all parties (i.e. management, activist investors, and potential suitors) that ZAGG is worth at least $9.00/share. The debt level is a bit high, but we think it is manageable, and the fundamentals are attractive. We think ZAGG is a Buy.
LIQUIDITY POSITION: Adequate
On May 28, ZAGG reported 1Q20 results. Cash and cash equivalents stood at $14M, with $100M outstanding on the line of credit. This company is very seasonal, as it sees a high proportion of sales and profits coming in during the holiday season (fourth quarter). Additionally, it is very much affected by new models of mobile phones and tablets hitting the market. The economic slowdown has extended through the midpoint of the year, so it’s possible that it will continue into the upcoming holiday season and put a damper on retail sales. Analysts are expecting only $0.16/share for 2021 EPS, so the consensus seems to be that the slowdown will linger into next year.
On April 13, ZAGG secured an amendment to the revolving credit facility. This increased the amount available to borrow from $125M to $145M. This allows them to draw an additional $45M through March 31, 2021. However, depending on how long the COVID-19 slowdown persists, the net debt position will most likely continue to dampen investor sentiment.
COMMERCIAL PROSPECTS: Good
ZAGG is a single reportable segment. They manufacture and distribute mobile tech accessories for smartphones, tablets, smartwatches, and other mobile technology in the US and abroad (the company is best known for its industrial-grade phone and tablet cases, as well as its InvisibleShield screen protectors).
Investors had been hopeful that the company’s strategic review would lead to a sale, but in the end they were disappointed. On March 11 after the market closed, ZAGG released a statement saying that the Board was ending the review process that had commenced back in August 2019. Since no buyer was found at a satisfactory price, the Board concluded that “stockholder value would be better enhanced on a standalone basis.”
There supposedly had been at least two potential suitors back in August 2019, with a potential purchase price of about $9/share mentioned. This would seem to validate the estimate of intrinsic value that management themselves put out: about $420M, or $10.90/share.
Rightfully upset, it looked as if investors were destined for a proxy battle. Roumell Asset Management sent a letter to ZAGG on March 18 making it clear that it was a mistake to give up on the sale process and that the stock was significantly undervalued. Thus far, no announcement has been made on if the sale process will recommence. But ZAGG did announce on April 15 that two new Board members had been appointed, expanding the number of members to seven. Also, effective immediately, all cash and stock-based Director compensation has been switched to an all-stock compensation program. This will serve to preserve cash resources in these uncertain times, as well as more closely align Director and shareholder interests.
Concurrent with the company’s announcement, major shareholders Roumell Asset Management and AREX Capital Management have both said that they will vote their shares in favor of the new Board members. This is a step in the right direction, since it shows that ZAGG management is acknowledging investor concerns.
Guidance for 2020 has now been pulled due to COVID-19. But prior to the guidance withdrawal, management was expecting flat net sales compared with 2020, along with adjusted EBITDA of $48M. At a minimum this would have equaled the operating performance during 2019, when adjusted EBITDA came in at $45M and adjusted EPS was $0.85/share. Simply just getting back to adjusted EPS of $0.85/share again for 2020 would have led to an attractive forward P/E of 3.5x. The valuation would become even more attractive should profitability improve, driven by the restructuring plan announced during 1Q20 earnings.
It’s also worth mentioning that there were several insider buys on March 16 and 17 at around $2.65/share. The amounts were relatively small (under $100k each), but it’s a more bullish signal than no insider buys at all.
Were it not for the debt, we think ZAGG would be a top contrarian pick in the much unloved retail sector. But even with the high leverage, we think the involvement from the activist funds, the small insider buys, and the attractive valuation make this deserving of a small position. We think ZAGG is a Buy.
There is a lot to like in ZAGG. Their products are popular and sell well, the forward P/E is low once things return to normal, there seems to be agreement from several parties that the stock is worth at least around $9.00/share, and there were several insider buys on March 16 and 17 at prices around $2.65/share. Were it not for the high leverage, this would be a top pick for us. But even given their current debt levels, we still think ZAGG is a Buy.
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Published By: Elle Investments Research Team
Phone: (914) 715-8066
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