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After all of the recent damage to Skullcandy (NASDAQ:SKUL) stock following the double whammy of the introduction of new Apple EarPods and the Morgan Stanley downgrade, I'm shocked that there has been no commentary about today's very interesting development. That is, Skullcandy hired Vizio's Kyle Wescoat as the new CFO, starting Oct. 1. To find out why this is more than just a trivial piece of boilerplate news, its important to look into Wescoat's background a bit. Below, I have listed my reasons why I believe that this new hiring is indicative of a potentially massive move in what is the most shorted Nasdaq stock by a wide margin.

  1. Wescoat is 60 years old, at or near the tail-end of an illustrious career with many successes. He was instrumental in the transformation of Vans from an ordinary footwear company into one of the fastest growing teen brands in history. Interestingly enough, during his stint with Vans from 1996-2001, he led a European expansion that resulted in the doubling of sales and profits. I believe this is interesting because Skullcandy is in the same boat right now, reaping healthy margins from Europe along with rapid growth that is outpacing already strong domestic year-over-year sales. By all accounts, he seems to be a specialist in international distribution. That's a big plus for Skullcandy.
  2. Following a relatively uneventful two-year stint at Cherokee, he was recruited by Aspen Education Group to prepare the company for a major liquidity event. He accomplished this successfully by overseeing the sale of Aspen to Bain Capital. It is apparent that his private equity roots run deep. While Skullcandy gets no respect from the Street, despite beating earnings five quarters in a row, perhaps the board has had enough and feels that shareholder value is best unlocked by putting the company up for sale? Clearly, Wescoat is the right man for the job having already executed a similar plan under similar circumstances.
  3. Wescoat is currently the CFO of Vizio, a company that at over $2 billion per year in revenue is nearly 10 times the size of Skullcandy. Of course, he was recruited by Vizio to prepare the company for an IPO. This IPO never happened, although it may in the future. There are executives who spend a career jumping from company to company to prepare for liquidity events. In fact, Mitch Edwards, the CFO of Skullcandy, was one of these types. He resigned in March following an oversubscribed and successful IPO for SKUL. Why would Wescoat leave a consumer electronics giant to take the same position at a much smaller company?

By all accounts, it seems pretty obvious that the 60-year-old Wescoat is not leaving his comfortable job at Vizio at this point in his successful career and uprooting his family from beautiful Huntington Beach in order to move to Utah and spend the next five or 10 years shuffling papers and going through the motions at Skullcandy. We have learned that he is an international sales specialist, with experience in Europe, which is an area of great importance to Skullcandy at the moment. This area is a "make or break" region for the company right now, and to unlock the full value of Skullcandy it needs to really press up its European sales. My guess is that will be Wescoat's first job.

If I was a betting man -- which, coincidentally, I am -- I would say that the next step will be the liquidity event. Since Skullcandy has already executed its IPO, it would only make sense that the liquidity event I am anticipating is likely to be a sale to private equity. As we have seen, Wescoat has done it before with Aspen, and a sale to private equity makes sense because despite how many times Skullcandy can beat the numbers, the stock gets continually hammered. Case in point: Fellow writer Helix Investment Management did a great job presenting the bull case here -- definitely worth a read before considering an investment in Skullcandy.

To wrap this up, the bottom line is that being a public company is not a universal solution for every enterprise. Skullcandy is very healthy, with no long-term debt and has experienced very rapid sales growth. Skullcandy is currently trading at a 2013 forward P/E of under 10. Normally a young, debt-free, cash flow positive growth story like this that has beat the numbers every quarter for the past five should be trading at least at double that multiple. I believe the board has now figured out that no matter what it does, it can unlock far greater shareholder value by selling off the company. So it makes sense that it went out and recruited a guy who does just that, and has done it well throughout his career.

I would not be surprised to hear some buyout rumors across the wires over the next little while. With over 11.5 million shares short and a highly concentrated institutional ownership, along with no real credible short thesis by anybody with any stature on the Street, this could shape up to be the squeeze of the century.

Source: Is Skullcandy Positioning Itself As A Takeover Target?