Description

Audiovox operates in two businesses: a Wireless company which sells a variety of cell phone products and accessories and a Consumer Electronics Group which sells car radios, car alarms and various other mobile electronic products. The Wireless group recently sold a 20% stake to Toshiba at a price that implies that the Wireless Group itself is worth nearly the entire market value of Audiovox as a whole. When you add the Electronics Group, which is quite valuable in itself, you get a good company selling at a significant discount to the sum of the parts.

The Wireless Group

The wireless part of the business sells cell phones and accessories. Audiovox simply distributes other companies products; they don’t actually manufacture anything or conduct any research or design. This type of strategy reduces risk and capital requirements.

In FY01 revenues came in at $966million while the company suffered a pre-tax loss of $17.7million. Losses have continued in the first half of 2002, with a pre-tax loss of $14.7million in the first six months of ’02. At the peak of the cycle in ’99 and ’00 the Wireless Group earned pre-tax profits of $31.3million and $31.0million respectively.

The business is low margin, has seen revenues decrease rather sharply, and is operating with losses. But the well-recognized brand and the distribution network do have real and significant value(and the brand and the distribution network are all that you’re really buying with this company.)

Toshiba recently purchased a 20% stake in the Wireless Group(upping their total stake to 25%) for a total consideration of $32million. This implies an overall value to the business of $160million. The 75% stake that Audiovox owns would be valued at $120million, or $5.45/share. I believe this valuation is conservative and any upturn in the companies business will result in the market valuing it at a higher level. But this is the figure that I’ll use in the rest of my analysis as it rests on an actual transaction and not speculation.

Consumer Electronics Group

The Consumer Electronics Group sells various accessories like car radios, car alarms, portable MP3 players, etc. Once again, Audiovox simply purchases and then distributes these products. They don’t play any role in the manufacturing.

The Electronics Group has been a much more stable business than the wireless. Revenues have been growing nicely and they have been consistently profitable. Revenues in FY01 were $301million and pre-tax profits were $12.6million. In ’99 and ’00 this business earned pre-tax profits of $11.4million and $14.8million, respectively. Over the last 4 quarters the Electronics business has earned pre-tax profits of $14.4million. The Electronics Group has $143million in total assets so they’re earning about 10% ROA before tax.

Given the steady profitability and the ROA of the business I believe that a conservative multiple would be 8-10x pre-tax earnings which gives a value of $115million-$144million, or $5.23-6.54/share. I’ll use the lower number.

Balance Sheet

The balance sheet is strong and should offer protection from any prolonged slump in the company’s business. Book value is $321million(14.59/share) and VOXX is trading at roughly 45% of book value. NNWC is $281.6million($12.80/share) so VOXX is trading at a good discount here as well.

Summary

Based on what I believe to be a conservative analysis VOXX is worth $10.70/share, which would represent almost a 60% return from the current price of $6.77/share. I believe the risk is low considering that they don’t make a thing for themselves, the B/S protection, and the fact that the Toshiba transaction values the Wireless Group at 80% of the total market value. Also, Toshiba is a large supplier and the increased stake in the Wireless Group should mean favorable supply terms going forward.

Catalyst

The valuation itself is the biggest catalyst in my mind. And once the companies markets turn for the better(especially the Wireless Group) the market will value this business at a much higher level. Also, if Toshiba increases it stake any further it would be a boost to the stock.