Wednesday, April 3, 2013

iGo Buy This Stock; Where Do *You* Go?

Shares of iGo (IGOI) fell a whopping 35% yesterday, as the market soured on the company's latest financials and an announcement that a partnership with Texas Instruments (TXN) will not go forward. Value investors who are sitting on bloated cash positions thanks to the market's runup should probably take a close look at this one.

iGo generates most of its revenue selling power supplies for mobile devices. Its two largest customers, Wal-Mart (WMT) and RadioShack (RSH), account for over 40% of revenues. There doesn't appear to be anything special about iGo's products; fads do occur in this industry, but in general iGo's margins will be determined by how cheaply/efficiently it can source its products vs the competition.

There's nothing particularly attractive about this industry. Customers will mostly be interested in buying products at the lowest price possible, so all industry players basically try to source their products from Asia's most efficient producers. Expecting to earn even marginally above one's cost of capital in this business over the long-term is probably reaching.

But while the business' prospects may stink, its price is very attractive. Thanks in part to the massive panic yesterday, the company trades at an enormous 64% discount to its net current assets. That is, while the company trades for just over $7 million, it has net current assets of almost $20 million. This kind of discount to net current assets is very rare for a Nasdaq-listed company in today's exuberant market.

Of course, the company is losing money and has generated negative free cash flow in each of the last three years. But because of the large discount to liquid assets, investors who buy in at the current price are protected to some extent. Included in the net current assets is a cash balance of over $10 million against no debt and little in the way of purchase obligations (including leases).

Upside potential, on the other hand, is quite high. If the company's steps to reduce costs to be in line with lower revenues are successful (announced in early Feb), the company will probably trade closer to the level of its net current assets, resulting in substantial appreciation in the price of the stock.

To be sure, iGo faces substantial company-specific risks. If you're an investor who likes the idea of buying a net-net in this space but want some diversification, consider spreading your investment between both iGo and battery-supplier Universal Power Group (UPG). Universal Power breaks even, but also trades at a 50%+ discount to its net current assets.

Interestingly, one of iGo's chief competitors is one of its customers. RadioShack has been shifting towards private-label products to increase its own margins, and has thus replaced shelf-space previously occupied by iGo with its own products. RadioShack has been going through its own difficulties; it currently trades close to net-net territory itself. If RadioShack is able to earn anywhere close to its 2011 level, it too would see substantial price appreciation.

iGo is not for the fainthearted. It's entirely possible the company will continue to burn cash until there is nothing left. But from a risk/reward perspective, the odds look to be on the side of the investor. With such a large discount to net current assets, it wouldn't take much to go right for investors to generate a whole lot of upside, while the downside risk is priced in. As part of a diversified portfolio of similar companies, the odds would firmly be planted in the investor's favour.

Disclosure: Author has a long position in IGOI, UPG and RSH


undertherockstocks said...

Saj - Thanks for sharing this. I looked at IGOI and was curious how you evaluate the melting ice cube aspect of the company.

IGOI has burned cash and ST investments at 40% per year the past two years (2010 $29m, 2011 $17m, 2012 $11m). Assuming a base case that the rate stays the same, the NCAV would equate to today's price around mid-2014. Is your view that the price will normalize to NCAV before then, or that the business will "pull a rabbit out of the hat" to create some intrinsic value before mid-2014?

IGOI appears to be a race against time and seems like you're saying you are comfortable with the runway? Thanks!

juan said...

I just checked it also - thanks Saj!

Like undertherockstocks above, I'm worried by the fast cash burn. I couldn't find the details of the cost reduction plan they announced in February - I found the announcement, but no specifics.

Their gross profit, which has been falling rapidly in the past few years, was 5.3m in 2012. Operating expenses (excluding asset impairment) were almost 14.4m. So if 2012 revenues and margins remain, they'd have to cut operating costs by 2/3 to break even.

Sounds difficult, especially since, according to the DEF 14A filed 2012-04-27, executives + directors alone made 2.5m in 2011 (I didn't find the number for 2012). And they don't have meaningful share ownership.

So here I think one is betting on either a quick liquidation, or better revenues/margins. I don't know enough to make that bet.

Saj Karsan said...

Hi Under,

I don't see the same numbers you do. For example, I see cash+ST investments have fallen less than $5 million in 2012.

I also expect reductions to catch up to revenue reductions, which have been enormous in recent years. You can see costs are coming down, so if the pace of revenue reduction continues to fall, I would expect cash burn to fall as well.

As I mentioned, however, this investment is not without risk. It is certainly possible this thing could go to zero. I just think the risk/reward here is appealing.

undertherockstocks said...

Agreed - this starts to look less risky if management shows ability to reduce costs faster than revenue falls. Yes my numbers were slightly off (I see the same as you do)...the cash burn rate is roughly the same.

Paul H said...

Great day for the stock! Hopefully the $3.95 offer closes.

Anonymous said...

Hi Saj,
I've been following your blog for a while now, first comment though. I'm also looking at IGOI as it popped up on a NCAV screen. After the 44% acq by Steel Excel, do you still own this stock? If so, what makes you stay in it?
Thanks, Jay

Saj Karsan said...

Hi Jay,

I do not, as per this follow-up post: