Description

Lowrance Electronics (LEIX) is a Tulsa, OK based company that manufactures, markets, and sells sound navigation and ranging (SONAR) and global positioning systems (GPS). The company offers 88 different marine, outdoor, aviation, and other products. Products are distributed through dealers, distributors, and mass merchants that sell to consumers. The company is caught in a competitive whirlwind that is unfolding. The stock is up five fold since being recommended in 2002 and now appears to be a short that has substantial downside potential.

The company is on a July 31st fiscal year end. The demand for products has historically been seasonal with the lowest sales occurring in the first fiscal quarter that ends in October and the highest sales occurring in the April quarter pre the boating season.

Capital Structure
The company has over 5 million shares outstanding on a $27.50 stock price yields a $140 million market cap. The long term debt is only 15 million to provide an enterprise value of just over $154 million. The company looks inexpensive at .92x sales and 2.5x book relative to Garmin’s 7.7x sales and 6.6x book.

Sales Trends
Sales in the most recent October ending quarter surged 34.9% and 44.7% in units due to the company’s April launch of the I-Way 500 personal navigation device. Marine sales in the quarter increased 13.9%.

LEIX’s gross profit dollars decreased $324,000 dollars with a gross profit margin of 26.4% vs. 37.4%! This compares to Garmin’s 53.9% gross profit margin. How many times have you seen this picture show….industry with high margins…competition comes in…1st shot across bow margins collapse on increased sales and the company says everything is okay!

It is a simple storey, but let’s talk about the major segments. Granted, the company has good base as a leader in the marine segment. However, there are many players (Furuno, Raymarine, Garmin, Raytheon, Northstar, Si-Tex, Navman, Magellan), and the West Marine / Boaters World types are starting offer discounts. Better yet, Garmin’s marine sales were down last quarter. Another important line of business is the handhelds. This business is showing signs of maturing.

The real bet on growth is on the I-Way personal navigation devices (pnd). The largest competitors, TomTom and Garmin, have vastly larger resources and are better positioned. Both these companies have 300 series devices that retail for $699 (down from $900+). Yet over the holidays, both Tom and Garmin ran $50 discounts through Best Buy and Circuit City (see Thomas Weisels 1/4/06 report on GRMN for details). Better yet, go to www.streetprices.com and look at the competitive offerings.

The CES show in Las Vegas indicates there are a host of competitors coming to the space at an initial $699 price point (Pioneer, Sony, Alpine, etc.) and that the industry will likely face severe competition. Add in that the auto makers’ offer in dash systems, mobile phones will start offering GPS capability, etc. This all spells trouble for the weakest player in the group…LEIX! I don’t think it has the financial resources and research/development to compete. Therefore, the stock is a short and will likely trade back to book…or worse.

Sadly, the company only gives limited guidance and never hosts a conference call. In addition, the company refuses to break sales down by product mix.

Garmin and Tom2 are also likely shorts.

Catalyst

Increased competition will further pressure margins. Even though stock appears relatively inexpensive at 17x, gross margins are already collapsing! The stock is up over 500% in last 3 years.