Zagg: $1 Billion Market Cap Is Within Reach

Mar. 2.12 | About: ZAGG Inc (ZAGG)

It has been eight months since my last article on Zagg Inc (NASDAQ:ZAGG). Given the record fourth-quarter and year-end FY2011 results, I would like to provide an update.

Here is a brief summary of the fourth-quarter and year-end results from the earnings release (here):

  • Record fourth-quarter consolidated revenue of $67.5 million
  • Record annual consolidated revenue of $179.1 million
  • Record GAAP diluted earnings of $0.32 per share for fourth quarter
  • Record GAAP diluted earnings of $0.63 per share for 2011
  • Exceeded full-year guidance and consensus estimates
  • Record operating cash flow (Author's Note: Cash flow was positive for the last three quarters, per the 27-Feb-2012 conference call.)

For the record, in a previous article (here), I was at $0.67/share for FY2011 results. I am guessing the difference was in the poorly performing third quarter of FY2011, and I underestimated the number of shares outstanding.

Here is a summary of recent financial results:

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Zagg's revenue has been increasing sequentially on a quarter-to-quarter basis for the last 11 quarters, with the exception of the first quarter of CY2011 and the first quarter of CY2010.

Zagg's year-over-year revenue growth is just as impressive. The company has been essentially doubling the previous year's revenue for the last six quarters.

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Last quarter had a record EPS, which was very much needed after several quarters of declining EPS.

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Last quarter, Zagg also returned to year-over-year EPS growth, with an impressive 146%. Fourth quarter 2010 had a 1200% increase over fourth quarter 2009, which makes the 2011 fourth-quarter growth of 146% worth noting.

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Cash per share is increasing nicely to record levels since its bottom in the first quarter of 2011. Prior to the earnings release, Zagg traded at approximately $10/share, with 8% of that being its cash value.

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Cash per share growth is accelerating.

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Return on equity has finally turned around.

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In my last article featuring Zagg, I was concerned about the deteriorating quick ratio due to inventory increase. The quick ratio has bottomed out and has improved to a level of around 2.5. This is mostly because Zagg has increased current assets faster than inventory. The last quarter saw inventory fall to a level lower than the two previous quarters.

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I define net operating profit (NOP) as income from operations divided by revenue. Last quarter, NOP was above the historical average but still within a statistical normal range, which shows Zagg can maintain its margin while increasing revenue.

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Finally, a ratio of revenue to net income attributable to stockholders. Last quarter saw an improvement over the previous two quarters, which means Zagg can still translate increasing revenue to bottom-line profits.

There are many detractors of Zagg, and those articles can be found here on Seeking Alpha spelling out the downside risk along with articles describing them. Above, I have presented the actual numbers and performance history. Below, I outline some recent items of interest, my takeaways from the February 27 conference call (some of which address a couple of concerns of detractors), and a prediction of Zagg's stock price over the next two years.

Other interesting news since my last article: Zagg was named to the NASDAQ Global Select Market (^NQGS). Per the 13-Dec-2011 press release (here),

SALT LAKE CITY--(BUSINESS WIRE)-- ZAGG Inc. (NASDAQ: ), a leading mobile device accessories company, today announced that the company has been upgraded to the NASDAQ Global Select Market. The NASDAQ Stock Market conducts an annual review of all NASDAQ Global Market issuers to determine which companies meet the initial listing requirements of the NASDAQ Global Select Market. The NASDAQ Global Select Market has the highest initial listing standards of any exchange in the world based on financial and liquidity requirements. Shares of ZAGG common stock will begin trading on the NASDAQ Global Select Market effective January 3, 2012.

"We are honored to be added to the NASDAQ Global Select Market, joining some of the most respected companies in the world who also uphold NASDAQ's rigorous qualification standards," said Robert G. Pedersen II, Chairman and CEO of ZAGG Inc.

The addition to this index increases demand from investors (investors who follow, track, and invest in the NASDAQ Global Select Market).

I was glad to hear the operational tone of the conference call (along with the glowing comments from analysts).

Robert Pedersen, CEO, commented how Randy Hales was appointed to the role of COO (press release here), allowing Mr. Pedersen to "personally dig in" and "bring the company to the next level" while Mr. Hales focuses on operational efficiencies, like accelerating the integration of iFrogz. Zagg has three long-term "levers"--distribution, product, and brand--around which Mr. Hales has set corporate achievement goals and metrics. Mr. Pedersen also stated that FY2011 marked the start of the process to build a more efficient company, which the previous examples illustrate.

Other notes from the 27-Feb-2012 conference call:

  • All new product must be accretive.
  • In regard to the pending iPad3 introduction: iPad3 will have an even larger impact than iPad2, and Zagg is well poised for this introduction.
  • The focus of 2012 is to get into regional carriers and dealers, of which there are 1,000 (emphasis added).
  • Online sales are down 1% from 13% in 2010. Goal is to get to 15%. Online sales has improved cash flow.
  • Walmart was 16% of sales, up from 0%.
  • The invisibleSHIELD sales were 53% of revenue, as compared with 77% in 2010.
  • Progress is being made on the tax-saving strategy. There will be "short-term pain" followed by "long-term gain."
  • Raw material and packaging material are at a very low risk for obsolescence.
  • HzO will no longer be considered in the consolidated financials.
  • As of 27-Feb-2012, Zagg's ownership is 37% of HzO (press release here).
  • HzO is currently developing OEM relationships. Timing is right for true water-blocking technology.
  • Keyboards and cases has done very well in 2011. "Year of the keyboard … and [Zagg is the] leader in keyboards." Keyboards and cases will be seen in more retailers, including new accounts (emphasis added).
  • FY2012 estimates include current distribution partners, product mix, and pricing outlook. Assumes continued use of existing channels with expanding SKUs in those channels and broadening of international presence. Timing of new devices has an impact on profitability. May update guidance as appropriate. FY2011 had four updates to guidance, which Zagg extended at year end.
  • Cash is to be used for debt payments.

Since the guidance does not consider new accounts, I feel the revenue projection is low.

The ultimate goal of Zagg is to be a $1 billion market cap company, which seems within reach, given the continued expansion of the tablet and smartphone markets. Being agonist to whichever OEM has the "hot" product allows Zagg to capture increasing volume for protective shields, keyboards, and cases. Add to that improved online sales of iFrogz and any HzO revenue in the next two years, and a $1 billion market cap appears well within reach.

Plan to reach $1 billion market cap:

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The plan assumes decelerating revenue growth after next year and share dilution of 20% per year. Next year's revenue is estimated at an 88% increase, which is less than FY2011 but more than Zagg's conservative 39.5% forecast for FY2012. Next year has a top line-to-bottom line ratio of 10.5% (current historical average). I estimate the following years it will increase to 12.5% because of Zagg's tax-saving strategy. Using a multiple of 15x, $1 billion is reached in two years at ~$22.13/share, which results in a CAGR of 41.71% per year (based on a closing price of $11.02/share on 28-Feb-2012).

I am long Zagg and currently plan on selling my cost basis at $15.45/share (leaving the "house's money"). That plan will be revisited as the price approaches $15.45/share or when any other positive or negative news is released.

Disclosure: I am long ZAGG.