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The Microcap Speculator submits: This week's Spot Report from Knobias highlights cell phone accessory maker Wireless Xcessories Group (ticker: XWG). The stock was a high flyer earlier this year, following on the coattails of competitor Forward Industries (ticker: FORD). XWG is now almost 50% off its highs and just reported record earnings. Time to pounce? Read my take after the Knobias excerpt.

Accessory to the Crime, XWG
Prepares Its Next Heist

Wireless Xcessories Group Inc. (amex: XWG) is the largest wholesaler of aftermarket electronic and cellular accessories in America. XWG offers more than 4,000 items that include rechargeable batteries, personal and vehicle hands free kits, portable and vehicle antennas, in-car and travel chargers, and plain and colored carrying cases. XWG sells to dealers and distributors through an in-house sales force and directly from its website. XWG also uses its technology and experience to help dealers and distributors manage inventory, logistics and e-commerce.

The BULLS Say...

Great Year, So What Happened? XWG has gone from $1.75-$15.90 (+809%), back to $6.70. It started with XWG's move from BB to Amex. July's FY-EPS guidance of 51-54c helped propel the stock to record highs and the market seemed happy to give XWG a 26x earnings valuation. Then the "bad news". Loss of a major customer, taxes, lower margins and other factors forced XWG to report a sequentially lower Q3 [7c] and cut its FY outlook by -18.5% (3 mths after upping guidance). Management made a mistake with its forecast and the market punished them. Despite hitting the top end of revised guidance, +44% Y/Y revenue, +128% Y/Y taxable income and +109% Y/Y EPS, XWG has lost -58% since new guidance. Current P/E is 15 vs 26+ earlier. If investors displayed previous "P/E confidence", XWG would be trading near $11.50.

Something for the Tax Man? XWG used its NOL carryforwards in 1H-05 and started paying Uncle Sam in 2H (one factor in XWG's lowered FY-05 forecast and subsequent sell-off). Either way, XWG has entered the realm of the "fully taxable". So how does XWG keep rewarding the marketplace? Continued growth and improved efficiency...XWG's major focus for 2006. XWG is expanding its product mix and revenue diversity (next paragraph). Along the way, XWG has made margin improvement "top priority". Throughout its turnaround, XWG has grown revenues and lowered headcount. Although XWG is increasing its sales force, management seems dead-set on increasing sales per employee ratios, incentives for higher margin sales and revenue diversification. Margin improvements and continued sales growth will help defeat the new tax burden.

Forget Turnaround, It's a Revolution: XWG's core business turnaround appears to be well in hand. As the "#1 U.S. wholesaler" of aftermarket wireless accessories, how much higher can you go? Well, it appears that XWG wants to dominate all aspects of "gadget" accessories. During 2005, XWG expanded into iPod, MP3 and Bluetooth accessories. Most importantly, XWG is using its leadership, relationships, technology and expertise to go beyond wholesaling and expand into many diversified support roles. In Jan-06, XWG agreed to manage U.S. inventory, shipping, and invoicing for German manufacturer, ANYCOM. In Feb-06, XWG agreed to manage e-commerce for accessory provider, Body Glove. XWG management has also hinted to a signed, but unreleased, support agreement with another major OEM. These "support" deals also give XWG expanded cross-selling opportunities to drive continued growth.

What To Watch: 1) The public release of a new support agreement with a major wireless OEM; 2) April's Q1-06 release. Look for 20-25% Y/Y sales growth, tax impact, improving margins and sales per employee ratios; 3) Future acquisitions. XWG has been intentionally "putting cash away" for acquisitions. Management has hinted at a deal in California to help them expand geographically; 4) New agreements that go beyond "traditional wholesaling".

The BEARS Say...

Insider Selling, Now a Buyback? Between the Amex listing and upped guidance, then the lowered guidance and drastic sell-off, XWG insiders sold at least 1M shares. Then, in Dec-05, XWG approved a 250,000 share buyback. So they think $10 is overvalued and $5 is undervalued? XWG management has explained the insider selling as just patient, long-term investors "taking a little off the table". XWG no longer provides specific earnings guidance after "blowing it" in Q2. The timing and quantity discrepancies of insider selling and company buybacks are sending mixed signals to the marketplace.

Sentiment and Resistance: Q3's lowered guidance and the upcoming tax consequences have really unnerved investors. After 3 qtrs of "doing no wrong", the marketplace has discarded XWG into the "well it's over" category. From a charting standpoint, XWG has a number of hurdles to return it to the $12+ category. None more difficult than the Nov-05 gap-down from $10 to $6.

My take: I don't like this stock, or fellow accessory maker FORD. In the past year, both companies emerged from oblivion and produced impressive results. But is it sustainable? The fact that XWG substantially changed its guidance twice (first up, then down) within six months indicates to me that pricing and margins are far from stable. While the fulfillment agreements are a positive step, I expect that more and more of XWG's product line will become commoditized over the coming year. XWG may prove itself to be more than a flash in the pan, but I'm not placing my money on it.

DISCLOSURE: I have no position in XWG or FORD. Not a recommendation to buy or sell any security. For informational and educational purposes only.

XWG 1-Yr Price Performance:

Source: XWG (Wireless Xcessories Group) is Not for Me