Friday, October 16, 2009


In a previous post, we discussed how as a result of circumstance, companies can go through tough times and good times that don't correspond with the economic cycle. Companies that had difficulties turning a profit in the strong economic period that preceded this downturn could go in one of two directions:

1) they could become companies mired in secular decline, unable to adapt to the current business environment, or
2) they could find a way to adapt and emerge as stronger companies.

As an example of the latter, consider Audiovox (VOXX), which sells consumer electronics and accessories. Prior to the recession, Audiovox had some trouble turning a profit. This served as an early wake-up call, forcing the company to focus on cutting costs and exiting lower margin products. While this had the effect of reducing revenue, the intention was to become a healthier, more sustainable business.

When the recession hit, Audiovox was already in the process of cutting its fat, whereas other companies were only just beginning. As a result, while many of its competitors are currently still losing money, Audiovox has now turned a profit for two quarters in a row.

Amazingly, while the stock has almost quadrupled since its March lows, it still trades at a discount to its net current assets. By finance industry standards, the company is "risky" due its high beta above 2. But from a value investor's perspective, the company's business risks do not appear onerous. The company offers a diverse range of products, and sells these products to a relatively diverse group of customers.

In addition to the discount to net current assets at which the company trades, the investor is offered the company's equity investments, investment securities, land, and intangible assets for free! But don't take my word for it; interested in another perspective on VOXX, or another stock you have your eye on? One of our sponsors,, offers our readers a free analysis of a stock of their choosing here.

Disclosure: Author has a long position in shares of VOXX


Mike said...

Hi Saj,
I just want to start by saying I love the postins, keep up the good work. I had a question about the VOXX stock you discuss above. On page 22(38 in the pdf version) of the most recent 10Q commercial commitments are discussed and they list $87,515,000 due in less than 1 year. A reference to (7) is included but for some reason I can't find the reference to that note. If they do have a financial commitment due in less than 1 year, that will pretty much wipe out their cash reserve. How did you account for this in your analysis?

Anonymous said...

I believe that is inventory that they've already ordered. Given net sales of at least $500M over the coming year, this is a small inventory purchase commitment. Also, if this business is to stay a going concern, this commitment should remain steady, or hopefully rise, over time.

Saj Karsan said...

Hi Mike,

I agree with Anon. If you locate the note 7 that you reference (it is just below), it mentions these are inventory purchases.

These obligations are only a fraction of annual sales, which is where the cash will come from to finance these obligations.

Furthermore, you will find this reference in previous 10-Qs as well, so there's nothing out of the ordinary going on.

Mike said...

Your right. I pulled the pdf 10Q off their website and it seems to be missing pages including note 7 for some reason. Thanks for the help!

tscott said...

I haven't done much research but don't you feel the discount to its book is justified given its historical profitability?

Saj Karsan said...

Hi Trevor,

You could pretty much say that about any stock trading at a large discount to its assets. And yet you could make a good living buying such stocks.