Description

Audiovox grew sales at 75% year over year and EPS 43% year over year, and is now trading at just over 15 times ttm earnings and 13 times expected fiscal 2000 earnings.

The company got its start as an import/export business many years ago, but began focusing on automobile electronics about 20 years ago. They purchased car stereos, car alarms, car phones, etc. from pac-rim manufacturers and then resold them in the U.S. under their own brand name. As car phones moved out of the car and into the hand, they became a larger and larger percentage of the company's sales. Today, the company has two divisions: Wireless (80% of sales) and Electronics (20% of sales). Audiovox is now the number 3 seller of cellular phones in the US (behind Nokia and Motorola) and number 2 in terms of phones which use CDMA technology (expected to be the new standard). The company still uses its original strategy: they outsource all of the manufacturing of their products (most of their phones are made by Toshiba and Hyundia), although they work with their suppliers in the design of the products. This means their margins are smaller than other cell phone companies, but at the same time they don't have the same capital requirements or risk. This also allows them to get cutting edge products to market very quickly, they are now releasing web-enabled, tri-mode and GSM phones. The wireless market is expected to continue to grow at an amazing pace with new technologies requiring current cell phone users to upgrade annually. Audiovox (who has gained considerable market share in the last two years) is well positioned to take advantage of this growth. They can get new products to market quickly, they have started an ad campaign to build brand awareness, and have signed major agreements with service providers (including one with the new Verizon venture making Audiovox the premier supplier and an initial order of 1 million phones).

Why is the stock so cheap? First, there has been a lot of speculation in the stock, and it was run up to $72 when techs were real hot last winter before getting slammed in the pull-back (all the way to $16). Second, there are concerns that the company will not be able to maintain its [already thin] margins going forward, putting pressure on its earnings. However, I believe that if a price war does occur in the cell phone market, Audiovox will be better equipped to handle it as they can pass some of the pricing pressure to their suppliers.

Other numbers on the company:
1) Earnings growth is expected to slow to about 15-20%.
2) The company trades at about 1/3 of sales and 1.5 times book value.
3) The company carries little debt as its capital requirements are low.

The value story here is an earnings growth one.

Catalyst

Possible catalysts include:
1) Continued growth in sales and earnings.
2) Possible buyout by one of their suppliers
3) New agreements with suppliers (especially globally)