Tuesday, May 5, 2009

LoJack Stock Flat...Or Is It?

LoJack (LOJN) stock trades today at exactly the same level it did two months ago. But in the last two months, it has experienced some wild gyrations, having traded almost 25% below its current price, and over 50% above its current price. Has the intrinsic value of this business really fluctuated so much since March 1st? Highly unlikely. (Note that we saw similar behaviour over the course of the life of Best Buy (BBY)).

Instead, what we are seeing is a highly uncertain auto market. With Chrysler filing for bankruptcy, GM's status up in the air, and weak auto sales in the first quarter (US sales were down 38% year over year), LoJack experienced a 40% revenue decline when it reported quarterly results last week. The stock price declined by over 30%!

Does it offer investors value at this level? It would appear so. The company has a market cap of $60 million, but carries a cash balance of $56 million! While it does have debt of $30 million, it has ample liquidity to cover this debt and then some.

As we've discussed with this company in a previous post, LoJack has a flexible cost structure (gross margin for the quarter was relatively flat despite the large drop in revenue). Furthermore, management has targeted $15 million in cost cuts in 2009 as compared to last year, and none of those savings occurred in the first quarter.

While nobody knows how long the slump in auto sales will last, LoJack has the ability to bring its costs in line with its revenue and a strong balance sheet, which means it can outlast a downturn. At current levels, it may offer investors little in the way of downside while offering strong upside potential if and when auto sales return. 

Disclosure: Author owns a long position in shares of LOJN.


PlanMaestro said...

Barel, first of all great blog and have been following your comments on LOJN for a while.

While I agree that LOJN looks cheap and has been in the short list for a while, there are a couple of things that jumped on me while reviewing the latest results

- Revenue model: lacks a stabilizing recurrent source. Compare it with the ITRN subscriber based model where they do not have to start from scratch every quarter.

- International sales: dropped 63% (!). This category has been the only one growing previous quarters. Part of it is the dollar appreciation but also unit sales have fallen of a cliff.

- Revenue recognition: In some categories (ie: international) they recognize sales while shipping. It is highly probable that they have been channel stuffing.

This company is not going to recover soon.

Saj Karsan said...

Hi Plan,

Thanks for the kind words regarding the blog.

Regarding LoJack, while I agree they do not have subscribers and so their revenues are not as stable, their sales are closely tied to those of auto sales. While a recovery may not be in sight, LOJN has the ability to stick around until it is, which is the main point. I agree this may not be soon, but all we're looking to do is buy cheap for the long term, not looking for quick trading profits.

Regarding the channel stuffing issue, I'll take a closer look and get back to you.


Anonymous said...

How are you valuing the potential $270 million lawsuit liability with their Chinese subsidiary?

Anonymous said...

Per the comment from PlanMaestro - LoJack is selling for a vastly cheaper multiple of 5 year average earnings than is ITRN. If business ever does come back, LoJack will appreciate much more than ITRN.

Saj Karsan said...

Hi Anon1,

The $270 million figure is likely a bit high, but you do have to allow for some probability of some subtraction from their cash reserves. Nobody really knows what will happen though, so that is a bit of a risk!

Anonymous said...

I hope lojack fails soon only saying this is because of the technology they use. RF signals are a thing of the past Why follow a signal to a location and not pinpoint it like a GPS. I was once an employee But let go the first quarter of 2009 and having to tell customers their unit is the best on the market was a lie and i felt bad after i left knowing they have a low recovery percentage rate thieves have caught on to the locations of the units installed. Lojack announces to investors they recovered a Stolen asset is like a cat bringing a mouse home for a reward just to get a another meal.Its not right to the consumers to fab such a lie