Cobra Electronic (COBR) is now entering a crucial period where possible risk/reward is heightened. I wrote the stock up favorably in December of last year at 1.10, setting a target of 7, citing the combination of low p/b and a real business with some brand name recognition. Cobra makes radar detectors and CB radios, and has developed AURA, a verified data-base of speed and red-light cameras worldwide.
Trading as high as 1.65 following 3rd quarter earnings, the company is at a crossroads, suffering financial stress in the form of breach and waiver activity on its loan covenants, but offering potential rewards from a recovery in its business. The 3Q 09 conference call included a statement that Cobra has executed an agreement with a major manufacturer of mobile phone and navigation products to include the AURA data-base in selected North American and European products beginning early next year. This is expected to be launched and announced early next year. Revenue from the deal is expected in the 2nd half of 2010.
On the breach and waiver, COBR was not in compliance as of the end of the 3rd quarter. They expect to be in compliance with their existing covenants at the end of the 4th quarter, and as of the conference call they had agreed to a waiver with fee, but did not modify their credit terms as they expected to be able to comply with what they have.
Risk and reward – Once a company starts down the breach and waiver of covenants road, the investor is on notice and there is the potential for serious loss of capital. Sad experience has taught me that the physical assets that seemed to provide a margin of security can be rapidly dissipated as the scenario drags on to the bitter end (pink sheets at 19 cents a share). These episodes end with the sour feeling that somebody made money on the mess, but that does not include shareholders.
On the other hand, there is the brand name. The company has a strong presence in the niche market of professional drivers, and it possibly would be worth more as an acquisition than it is as an independent company. Finally, there is the enticement and allure of the agreement with the unidentified major player. I would characterize the upside as large but indistinct. Sometimes these companies that trade a dollar a share turn into 4 baggers or better.
Valuation - Constructing a weighted average valuation, pulling numbers out of the air, I get the following result:
Weighted Average Valuation Analysis
The shares closed Monday at 1.65, and are still a buy for risk tolerant value investors. Clarity on the outcome will improve substantially by the 2nd half of 2010. I have a low cost position, including a buy March 13th at .92. I reduced it by 40% following the last earnings, based on risk tolerance, although the company is still undervalued.
Independent Investor – There were no analysts on the last conference call. Independent investor Timothy Stabosz asked a fair number of questions, which I appreciated because otherwise the call would not have provided anything more than was in the prepared remarks. Mr. Stobasz has acquired more than 5% of the shares and filed an SC 13D. He describes himself as a Graham and Dodd investor and has included quite a bit of detail on his thinking about Cobra. He makes a lot of sense and I would suggest that readers follow the link if they are interested in this situation.
Strategy – Cobra is relatively illiquid and frequently sports a bid/ask spread of .10 or better. As such efforts to trade any large amount of shares on short notice will involve some slippage on the spread. On the plus side, any efforts by other investors to buy or sell large positions will be visible.
I plan to hold my existing position until I have seen both 4th quarter earnings and some specifics on the order from the unidentified large player.
Disclosure: Long COBR