LoJack: Do Repeated One-Time Charges Make a Pattern?

Includes: ITRN, LOJN
by: Saj Karsan

LoJack (NASDAQ:LOJN), a provider of hi-tech products that help recover stolen vehicles, is one of those companies with strong earnings potential. Before the recession bludgeoned new car sales, LoJack was earning EPS of about $1 annually (the company's share price is around $4 today). There may also be reason to believe there is some persistence to this level of earnings, as LoJack has integrated its systems with law enforcement agencies, has several regional networks in place to detect/find stolen assets once a unit has been reported stolen, and uses its FCC licensed radio frequency and proprietary technology that can find vehicles that are hidden from view (unlike GPS systems).

Furthermore, the company is leveraging its existing infrastructure as it creates products to find not just vehicles but construction assets, laptops and even people with cognitive disabilities. Investing in complementary products to expand markets may help grow sales for years to come, and is one of the 15 things to look for in a stock according to Philip Fisher, whose book is in the process of being summarized here. The company also has more cash than debt, suggesting it can and will emerge from this downturn unscathed.

What is concerning, however, is the multitude and magnitude of some of management's mistakes in the last few years. When calculating a company's earnings power going forward, investors will often add back (and therefore avoid penalizing a company for) one-time charges and other expenses that are not expected to re-occur. When one-time charges occur frequently though, the investor should strongly consider whether management has a tendency to make reckless mistakes.

In the case of LoJack, some of these mistakes have cost shareholders dearly. The company's handling of a contract with a licensee ended up costing shareholders $18 million in a settlement last quarter, which is no small sum considering LoJack only trades with a market cap of $70 million. In addition, the company has taken another $52 million in special charges over the last two years for various items including restructuring charges and asset write-downs as a result of overly optimistic acquisition prices LoJack has been willing to pay.

Though a good business with strong potential and a cheap share price, the expensive mistakes LoJack management has made do not inspire confidence. Investors are left with the task of trying to determine whether such gaffes are likely or unlikely to occur going forward, and this is no easy assignment.

Disclosure: None