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Smartphone and tablet cover maker ZAGG (ZAGG) reported 2012 earnings Tuesday night that knocked the ball out of the park across all metrics. ZAGG makes and sells affordable invisible protective shields for everything from iPods to smartphones to tablets. Unfortunately the only type of cover it doesn't sell, is one that allows shorts to "cover" their positions cheap. Shorts had been recklessly piling into ZAGG, clearly not expecting the report which much have hit them like a 2 X 4 in the head. At last count short interest was a staggering 8,848,900 which represents a short ratio of 12.8.

In the Q3 report, ZAGG had missed analyst estimates rather badly and shorts were clearly thinking ZAGG's best days were behind it. They were clearly wrong. The Q4 report and the outlook for 2013 blew away analyst expectations. Now with the cheap valuation ZAGG has in light of the report, and with 1/3rd of the float short representing nearly 13 full days worth of volume, shorts may be in big trouble. They are going to have a tough time covering.

Consider:

  1. Q4 came in at $87.5 million, up 29% YOY and beat estimates by around $4 million or 5%.

  2. Q4 non-GAAP EPS came in at .34, up 26% YOY and beat estimates by around .05 or 17%.

  3. Full year 2012 non-GAAP EPS was $1.14 leaving a cheap trailing PE of under 7 with more growth forecasted ahead!

  4. ZAGG guided for $313 million to $318 million for 2013 or at least a 20% growth from 2012 along with increased full year EBITDA of more than 10%, showing no signs of its sales and earnings power slowing down any time soon.

  5. Average analyst estimates for 2013 prior to this report were .98 EPS. In light ZAGG beating analyst expectations across the board, I expect that analysts will revise estimates upwards in the days and weeks ahead along with possible upgrades. At the very least, estimates should rise at least 10% higher than 2012 results or $1.25 EPS for 2013. This leaves an extremely cheap-looking forward PE of less than 6.

  6. ZAGG recently announced a share repurchase program for up to $10 million that shorts will have to compete with when covering.

  7. ZAGG has a dirty habit of raising and re-raising guidance then still beating that guidance, as seen with last quarter's outlook ahead of this beat. Clearly ZAGG is in under-promise, over-deliver mode. I wouldn't be surprised if its 2013 guidance is raised several times throughout the year.

  8. In the Q4 conference call, ZAGG mentioned last month 70 new SKUs were introduced including two new product categories for 2013. CEO Randall Hales mentioned that a lot of the 2013 guidance did not include many of the new products. Any success from any of them certainly leaves room for upward guidance revisions.

So what hope do shorts have going forward? I suppose the dynamics of the smartphone and tablet business are constantly changing with new competitors in ZAGG's space so maybe shorts can get lucky and something will quickly turn for the worse. I wouldn't hold my breath though. ZAGG, especially at this price, is clearly earning its valuation and then some and has a strong foothold in its niche as evidenced by the numbers. Shorts may not have been interested in purchasing a ZAGG cover shields before this earnings report, but I can assure you in light of the earnings report there's a much more expensive "cover" they have to worry about and this one doesn't come with a shield (unless they were smart enough to hedge with call options).

Source: ZAGG Shorts May Be Facing A Cover They Can't Afford