I have been negative on the Skullcandy (NASDAQ:SKUL) turnaround story since a few days before Q4 2013 earnings when the stock was trading at $8.50. I rode it up from the $5s but just didn't see a good risk reward scenario in the $8s. Of course, I left a lot of meat on the bone as the company beat expectations and rallied as high as $11.40.
However, as predicted, it peaked and pulled back over the past several months to $6.76 today, ahead of earnings where I got long again a few minutes before the Q2 earnings report release. The reason that I changed my opinion is that I felt that the sentiment became too negative and that with Q2 GDP numbers being so strong, it was very unlikely that the company would miss expectations.
The Q2 earnings highlights include a big EPS beat ($0.06 vs. $0.01 consensus), a 50-basis point margin improvement, reduced SG&A and updated FY2014 EPS guidance to $0.22-$0.26 compared to a $0.19 consensus. On the call, CEO Hoby Darling mentioned that Astro Gaming continues to outperform and is "on fire now." The company has a 95% market share in the over-$200 premium gaming headset market.
As a result of this new updated information, I am raising my outlook on Skullcandy. My new fair price target is $9 per share, which represents a 33% return on today's closing price of $6.76. I will be a buyer of shares in the $7 range.
Disclosure: The author is long SKUL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.