I wrote this report in the Summer of 2007 on Audiovox Corporation (ticker: voxx) for a job interview. Feel free to leave any suggestions.
Abstract
Audiovox Corporation operates in the competitive electronics market, requiring constant innovation to maintain healthy margins. Audiovox has recently purchased OEHLBACH Kabel GmbH to promote expansion in international markets. However, the company is earning a low rate of return and it is unlikely that acquisitions will allow Audiovox to have sustainable growth. Furthermore, it can cut into the company’s cash reserves, which may decrease shareholder value. A Sell recommendation is suggested for Audiovox due to poor earnings and lack of future prospects.
Introduction
Audiovox Corporation operates in the competitive consumer electronic market. The industry requires constant innovation to bring new and exciting products to market to maintain healthy margins. Larger companies can absorb a setback, while many of the smaller companies without brand awareness can have trouble surviving. Direct competitors of Audiovox include Sony, Panasonic, and JVC, most which are significantly larger than Audiovox (2006 Annual Report). Audiovox does not have significant brand name recognition compared to gorillas like Sony and Panasonic, but the company does have some consumer recognition.
Audiovox has several competitive advantages. Offering a wide variety of products allows Audiovox to diversify away risk to obtain a lower risk profile. The company has no fixed costs from manufacturing and therefore can avoid costly capital expenditures on failed projects. Also, the outsourced manufacturing of the company allows Audiovox to have lower costs in a weak macro-environment.
Market Outlook
Ultimately, this sector is driven by the consumer. The housing slump, sub prime woes, high gasoline prices, and slow GDP growth have cast a long shadow on consumer spending. Despite the negative news, the consumer has remained quite resilient as consumer spending rose an extremely healthy 4.2% and durable good purchases increased 8.7% in the first quarter. The expected return on the stocks should remain constant as long as interest rates hold steady. Audiovox’s size does not allow it to be the first to the market, but Audiovox still stands to benefit from their niche product offerings that can demand a premium because of lowered competition. Also, Audiovox can fill the void that large companies can create as they cater to the mass markets instead of working with products that can ring up only a few million in sales each year.
Expansion
Audiovox has been looking toward the international markets to expand growth. Recently, Audiovox purchased OEHLBACH Kabel GmbH to help promote expansion in international markets. This is expected to help the company grow and drive new sales. Over time, operating margins should improve as costs due to the acquisition abate and Audiovox can streamline operations. Furthermore, the company is investing in supply chain management software and other business processes to improve performance (Q4 2006 Conference Call). Unfortunately, it does not appear as if these acquisitions and upgrades are enough for Audiovox to have sustainable growth. The recent expenditures may provide short-term growth in profits, but for continued growth the company is likely to need to derive profits through more large-scale capital intensive investments such as further acquisitions.
Current Earnings
Total revenue at Audiovox has recently decreased to $456,690 in FY 2007 from $539,716 in FY 2006, but gross profit margins increased from 11.5% to 17.4% when comparing FY 2007 to 2006. This highlights the company’s drive toward higher margin items. Audiovox’s operating loss decreased from $27.6 million in 2006 to $5.0 million in FY 2007. Overall, the company reached profitability for FY 2007 with income of $3 million due to income from its subsidiary. For Q1 in FY 2008, operating loss was $1.6 million mostly due to acquisition costs. The company was profitable during this quarter due to other sources of income.
Balance Sheet
The company’s balance sheet indicates a current ratio of above 5 meaning the company can easily withstand obligations to pay liabilities in the short term. The company carries very little long-term debt. The company is hanging on to excess liquid assets in the form of short-term investments. Based on its current earnings, the company should return the short term investments to shareholders as the main line of business does not seem to be very profitable and there is little evidence that the business can generate substantial profits in the long run.
At first, Audiovox appears to be overvalued with an earnings multiple of 98, but the balance sheet shows substantial value in the company. However, based on FY 2007, Audiovox has a book value per share of $17.5, which is much higher than the current stock price of $12.75/share. The tangible book value per share is closer to $14.3, which is still well above the current price per share. It is unlikely that the asset prices are incorrectly valued as much of the assets are made up of short-term current assets that are valued at a market price opposed to historical cost.
Future Prospects
The company can still remain valuable if the Audiovox does not continue to spend its cash reserves. Currently, Audiovox is earning a poor rate of return considering the capital it is using to generate its earnings, as the return on equity is extremely low. Also, Audiovox is continuing to acquire business and is using up its excess short-term assets. The best way to realize shareholder value might be to liquidate the company. At the current price/share the downside risk of the equity is limited, but based on the price history of Audiovox it appears as if the market will not likely recognize the intrinsic value of the firm. There may be barriers to liquidation or return of wealth to shareholders, which can prevent Audiovox from becoming fully valued. CEO, John J. Shalam “owns approximately 55% of the combined voting power of both classes of common stock. This will allow him to elect our Board of Directors and, in general, to determine the outcome of any other matter submitted to the stockholders for approval. Mr. Shalam’s voting power may have the effect of delaying or preventing a change in control of the Company” (Annual Report). Shalam may be holding onto the company for other reasons that do not include maximizing shareholder wealth.
Conclusion
To conclude, a Sell recommendation is suggested on Audiovox because of its poor future prospects and the low likelihood that the company will return the excess cash and short term investments to shareholders. As long as the company has significant current assets, the downside risk is limited. The company seems more interested in acquiring new lines of business, which may use up the surplus of short-term investments. To reiterate, the stock should be sold if currently owned and the proceeds should be invested at a higher rate of return.
Sources Cited:
Audiovox Corp 2006 Annual Report. Retrieved July 9, 2007. http://library.corporate-ir.net/library/91/913/91378/items/252118/06018_Audiovox_Corporation_Form_10K.pdf
Yahoo Finance, Audiovox Corp. Retrieved July 9, 11, 2007. http://finance.yahoo.com/q?d=t&s=VOXX
Google Finance, Q4 2006 Conference Call. Retrieved July 9, 2007. http://web.servicebureau.net/conf/meta?i=1112933571&c=2343&m=was&u=/w_ccbn.xsl&date_ticker=5_15_2007_VOXX
