ZAGG: A Growth Story Revisited

 |  Includes: AAPL, BBY, DTEGY, RSH, S, T, VZ, ZAGG
by: Ian Cassel

I invested in ZAGG Inc (NASDAQ:ZAGG) back in October of 2008 buying a sizeable position under $1. The stock was about to go on one of the best runs of any stock over the next several months ($0.60-7.00) which went against the grain of a worldwide economic collapse. I fully believe that to know where you are going you have to analyze where you came from, learn from your mistakes along the way, and then execute. Here is a short overview of the past and how it leads us into the future of ZAGG.

ZAGG originally sold its products through its website at until they signed up their first major retail account, Best Buy (NYSE:BBY) in mid 2008. During the second half 2008 through 2009 Best Buy expanded its ZAGG SKU’s aggressively. They started with 3 SKU’s in 300 Best Buy stores, and 12-18 months later Best Buy was carrying over 40 SKU’s in all 1000+ stores. From Q3 2008 – Q2 2009 ZAGG beat analyst estimates handily as ZAGG sold millions of invisibleSHIELDs from consumers looking to protect their gadgets. The success of the Apple (NASDAQ:AAPL) iPhone was also a big boon to ZAGG as the invisibleSHIELD quickly became the best selling accessory for the iPhone. As Best Buy and international retailers continued to sell more and more ZAGG product it started to cannibalize website sales thus reducing overall gross margins. This margin decline along with lofty expectations lead to ZAGG missing earnings estimates a couple quarters in a row and the stock traded back down to $2.

In 2010, with ZAGG at a 52 week low, the management team acted quickly and turned the company around. A once “pumpy” IR presentation was replaced with a under promise and over deliver approach to Wall Street. ZAGG issued guidance of 30% growth for 2010, a number they felt they could beat. Through the first half of 2010, the company launched complimentary new products and announced new partnerships with AT&T (NYSE:T), Staples (NASDAQ:SPLS), and increased distribution through RadioShack (NYSE:RSH). ZAGG blew away analyst consensus in Q2 2010 with $15m revs and 0.08 EPS vs $11.5m revenue and 0.06 EPS consensus. ZAGG now looks to be back on track as investors are looking for a secondary way to play the iPhone, Blackberry, anything with a touch screen boom.

Best Buy is thought to be a $25+ million annual account for ZAGG, and I believe the AT&T account which launched Q3 2010 will end up being a similar sized account over the next 12-18 months. Now that AT&T has launched ZAGG products, I would expect Verizon (NYSE:VZ), T-Mobile (OTCQX:DTEGY), and Sprint (NYSE:S) will soon follow. I believe the remaining three mobile carriers represent another $60+ million in annualized business to ZAGG. When you add in further product penetration in international markets the growth curve seems to be back on track.

I estimate ZAGG is currently on a $45-50 million revenue and 0.25 EPS annual run rate, which coincides with the $36 million and 0.15 EPS run rate when it exited 2009 just two quarters ago. My guess is they exit 2010 closer to a $55-57 million revenue 0.28-0.30 EPS run rate. With this type of growth rate, the stock deserves at least a 20 P/E, so I would expect the stock to move closer to a $5-6 valuation over the next couple months.

Disclosure: Long ZAGG