Description

Cobra’s (COBR) current stock price provides an opportunity to purchase shares in a solidly profitable company with some significant brand equity at about book value and at a small premium to working capital. The company was posted on VIC almost three years ago with expectations of great earnings and growth. Unfortunately, the growth and earnings have not materialized over the past three years and the shares now trade below their price three years ago. My argument is that the market dominance and prospects for the company’s brands are not reflected in the stock price.


The Products

Cobra is the number one brand in Citizens Band radios and radar detectors. Yes, CB radios are still popular with truckers and the company has had excellent success in selling many special edition models to them over the past several years. As management has pointed out, many truckers own two or three models. This market is obviously not a growth market but one with provides excellent stability, margins and cash flow. Cobra has been a leader in applying laser detection technology, including introducing the industry’s first laser-signal detector and the industry’s first integrated radar/laser detector with 360 degree laser detection capability. Because of the popularity of the company’s unique products and continued innovations, Cobra has been the fastest growing radar detector brand over the past several years and continues to be the market leader.

Cobra is a strong number two in the worldwide Family Radio Service/General Mobile Radio Service (“FRS/GMRS”) two-way radio category. This is where the company has experienced its problems over the past few years. Expectations of great growth and profits where thwarted when market leader, Motorola, significantly cut its prices and started a price war. The company has continued to compete effectively and continues to be a strong player in this area but the margins have not been what they had expected. Recent results have been more encouraging. When I have asked why they simply do not just deemphasize this market or exit, they have replied that they continue to see opportunity here and continue to make a profit.

The opportunity for growth for Cobra lies in its new products. In 2003, Cobra introduced a line of hand-held GPS devices for recreational use and a line of marine radios and power inverters. In 2004, Cobra entered into the mobile navigation market with the introduction of its “Plug and Go” mobile navigation devices. The company is targeting a number one or two position in these markets also. The marine market is a mature one but the company expects steady and predictable penetration. The company is very encouraged by the recent Las Vegas consumer electronics show. Customers are showing strong interest in its mobile navigation and hand-held GPS products. The company continues to believe it has a competitive advantage.


2004 Results

2004 results were acceptable but nothing to get excited about. Net income increased by 29 percent, to $2.4 million in 2004 from $1.8 million in 2003. Net sales for 2004 increased by 7.0 percent, to $123 million from $115 million in the prior year. Earnings per fully diluted share were $.36 in 2004, as compared to $.28 in 2003. The performance of the company during the company’s fourth qaurter, the company’s most critical quarter, is best summarized by a quote form the CEO. “We are pleased to be able to report to our shareholders an increase in both sales and net income for this quarter,” said Jim Bazet, Cobra’s President and Chief Executive Officer. “Our sales increase reflects the success of our first mobile navigation product, the NAVONE 3000, as well as a strong showing of our radar detection category and increased handheld GPS product sales for the quarter. Additionally, Cobra’s international business was up sharply, particularly as Canadian sales of longer-range GMRS two-way radios took off in response to the recent government approval of these products. Offsetting these increases, in part, were declines in Cobra’s domestic two-way radio business, as average selling prices and unit sales reflected the maturation of this category.” . “Cobra’s improved gross margin was driven by closer management of inventories, resulting in fewer markdowns and closeouts, particularly in the two-way radio category,” said Bazet. “International sales, both in Canada and Europe, also had higher margins, in part due to the favorable impact of a weaker dollar.”


2005 Outlook

For 2005 Cobra is forecasting an increase in both sales and earnings, driven by its new product lines and by improved performance in Europe. However, the usual seasonality of the business will continue to hamper performance in the first quarter. In the current quarter, the company is forecasting lower sales and a greater loss as compared to the first quarter of 2004. Obviously, the company expects that the results for the balance of 2005 will exceed those of last year. When I asked what caused the first quarter difficulty management noted that some of their retailers had excess inventories. Management asserted that they are confident these inventories will be sold off during the first quarter.

Balance Sheet

Cobra has the benefit of an excellent balance sheet. The company has no interest bearing debt. The current ratio is 4.5 (as adjusted for deferred taxes and cash value of life insurance). Tangible book value is approximately $7.40 per share and net working capital is $6.30 per share.


Valuation

Price to Earnings $7.40/.36 = 21

Price to Tangible Book $7.40/7.40 = 1.0

Price to Net Working Capital $7.40/6.30 = 1.17

The P/E is obviously unexciting but one must keep in mind that it reflects the significant costs of product introductions over the past few years and the competitive environment in the two-way radio market. What it does not reflect is the significant margins and value of the company’s dominant brands.


The Thesis

The previous posting three years ago makes an extensive case for the numerous catalysts that exist to drive the price of Cobra shares higher. You definitely should read this write-up as many of the arguments still apply. Let me argue the case differently. In my opinion, Cobra shares represent a very inexpensive option on the success of the company in the mobile navigation and hand-held GPS markets. If history is any guide, the company has a reasonable probability of success with its new products. If it were to fail what we would be left with is a company with dominant positions in several consumer sectors selling for only a slight premium to liquidation value! In the current market environment, where small cap value is extremely scarce, Cobra represents an excellent value.

As for forecasting 2005 earnings and beyond, I will leave that to the “analysts.” (Unfortunately the company does not break out revenues by product which makes forecasting almost impossible.)

Catalyst

Significant undervaluation and success of new product introductions.