Cobra Electronics: Brand Equity, Discount to Tangible Book Value

Dec. 9.08 | About: Cobra Electronics (COBR)

Cobra Electronics (NASDAQ:COBR) is another book value play, in this case in Consumer Electronics, where the stock trades at a fraction of tangible book, but you have a real business with real earnings. Cobra makes radar detectors, CB radios, two way radios, power inverters, and other communication and navigation products. The name is known and there is a certain amount of brand equity. At yesterday's closing price of 1.10, Cobra trades at 18% of tangible book value (5.70); or 1.1 X TTM Operating Cash Flow. The dividend is .16, for a yield of 16%.

I first became interested in Cobra because of the potential growth I saw if they were successful in entering the GPS market. However, they were not able to compete with the likes of Garmin (NASDAQ:GRMN) and late last year they decided to substantially reduce GPS, except for niche products. In retrospect, it was a sound decision. The effort led to losses in 2006 and 2007, including charges in connection with the change of strategy.

There is an Annual Meeting presentation from May available on the company's website. It is informative, and includes adjusted EBITDA (a nonGAAP metric) which is food for thought. Because of the charges related to reducing their GPS strategy, it is difficult to get a clean look at results, but management has done the work for you. Averaging adjusted EBITDA for 2004-2007, it works out to 1.17 per share.

The company operates in two segments, Cobra and PPL (Performance Products Limited.) PPL is located in the UK and has some interesting products including a data-base of speed camera locations. PPL is a fairly recent acquisition, properly integrated and profitable, and there have been synergies.

The first three quarters of 2008 have been profitable, leading up to the fourth quarter which has historically been the strongest. In listening to the 3rd quarter conference call, I was struck by management's determination to stick to their knitting to capture sales and tailor production to sales on an optimal basis. The analysts, noting as I do the pathetic price to book ratio, were pushing for management to do some presentations to investors in order to generate some increase in share value.

Basically management, in addition to being focused on making the 4th quarter profitable, was concerned that some products they are readying for the Consumer Electronics Show (CES) in January 2009 need to be perfected before they are talked up. They do plan to attend CES and bring some good new products with them.

I have been building a small position since April, with an average cost of about 2.37. I continue to add as I think the price in the dollar area allows ample room for a profitable recovery. My target is 7 per share, based on 4 X my projection of EBITDA for 2008.

Because the 4th quarter will make or break the 2008 year, I look to get my position up to full size before earnings are announced. If results are good,say .20 to bring the year in at .50, the shares should easily rally from the current dollar area. If the results are not so good, I don't know that the stock can go much lower: you have the dividend to look forward to, as well as margin of security in the tangible book value. From there, it would be a question of taking a look at what they bring to CES and then deciding whether to continue the position.

Disclosure: Author holds a long position in COBR, no position in GRMN