Wednesday, November 19, 2008

Jacked Up For LoJack

The auto industry is in a tremendous drought. For those who believe the industry will emerge from this drought sometime in the next few years, this is a great time to pick up some bargains in this industry. On Saturday, we discussed some criteria to look for when determining if a stock in this industry would make a good long-term investment. One company that appears to fit these criteria is LoJack (LOJN).

LoJack sells tracking units that help its customers locate stolen or lost mobile assets. It has integrated its systems with law enforcement agencies, has several regional networks in place (to detect stolen assets once a unit has been reported stolen), and uses its FCC licensed radio frequency and proprietary technology that can find assets that are hidden from view (unlike GPS systems), all of which make it difficult for competitors to replicate their business.

But how does it match up to the criteria we laid out for long-term investments in this area? First of all, it's financing structure should allow it to last through this downturn. Its cash balance of $66 million is much higher than its total debt of $27 million. Furthermore, it has remained cash flow positive through even the last quarter (though it does show negative earnings due to a writedown of Goodwill).

Second, it is not dependent on any one car manufacturer. LoJack unit purchase decisions are made by individuals purchasing vehicles regardless of maker, and by insurance companies looking to reduce losses due to theft.

Finally, could LoJack be in a secular downturn rather than just a cyclical one? This would seem unlikely. International sales were up 40% last quarter as LoJack enters new markets, which made up for the drop in domestic demand which occurred due to the slower pace of new vehicle sales. LoJack is also diversifying from its reliance on vehicles, as it recently obtained approval to use its technology for use on construction equipment (for which it has already begun to produce revenue) as well as for persons with cognitive disabilities (for which it expects to have a product out in 2009/2010). It also currently has a "LoJack for Laptops" program and has also recently made its product available for motorcycles.

But is the stock cheap? LoJack's EPS has averaged just under $1 for the last four years, while its current stock price sits at just under $5. For a company with more cash than debt, good revenue growth prospects, and a few factors which make it difficult for competitors to copy, its stock price would seem to be trading at a large discount to its intrinsic value.

Disclosure: None


Unknown said...

Barel, I was actually analyzing LoJack. Actually, my only concern was technological obsolescence, in particular celular technology. Do you know anything about this?

Saj Karsan said...

Hi Matias,

Yes technology is a risk with this company. I don't know of cellular technologies that compete on this scale, but definitely GPS is a very real alternative. LOJN has pretty good disclosure in their 10-K about competing technologies and the major differences in case you want to read more about it.

Unknown said...

Well, at 4.25 I do not care about technology obsolescence. It takes a while for a technology to become obsolete. Just look how USMO has become a wonderful investment. Who would have thought that pagers would still be around.

Thanks Barel