z agg (nasdaq: zagg) april 3, 2014 1 jason chan michael derenzo rodrigo serna
TRANSCRIPT
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ZAGG (NASDAQ: ZAGG) April 3, 2014
Jason ChanMichael DeRenzoRodrigo Serna
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AGENDA
• Introduction• Company Overview• Macroeconomic Outlook• Relevant Stock Market Prospects• Financial Analysis• Valuation• Recommendation
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COMPANY OVERVIEW
• Founded in 2005 and headquartered in Salt Lake City, Utah• Designs, produces, and distributes mobile and media accessories,
namely InvisibleShield• Blackrock currently holds 10.75%• Mainly produce protective screen coverings under InvisibleShield
brand name• Moving into mobile device peripherals such as headphones, power
products, and gaming products– Fastest growing market segments are tablet and smartphone– Look to serve global accessories market which is expected to increase
from $44bn during 2013 to $60bn in 2016
Source: Form 10-K 2013
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
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COMPANY OVERVIEW – MANAGEMENT’S OUTLOOK
Source: Form 10-K 2013
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
• Product offerings– New offerings in gaming, mobile, and audio accessories– Continued growth in existing mobile device accessories including
keyboards, screen protectors, and cases• International sales– Distribution center in Ireland to compete in European market and
increase brand recognition– Focus on distribution through targeted, global distribution partners• Increase volume from internet sales
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Source: http://www.theguardian.com/money/2012/mar/12/family-income-dip-again
• Disposable income• Projected sales growth rates in key
market segments such as tablets and smart phones
• Cost of labor in China • Cost of raw materials• Shift from in-store sales to online
sales• Potential Product shift through
innovation
MACROECONOMIC OUTLOOK – KEY EXTERNAL DRIVERS
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
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INDUSTRY OVERVIEW – CONSUMER ELECTRONICS
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Sources: http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=1024 http://www.statista.com/statistics/200248/forecast-of-tablet-pc-sales-in-the-united-states-from-2010-to-2015/
Current Performance• Consistent demandKeys to Success• Innovation (Differentiation)• Control cost structure (Low cost
leadership)• Distribution networksIndustry Trends• Little to no long term debt• Heavy R&D expenditures• Preferences shifting to
multi-purpose devices
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INDUSTRY ANALYSIS – CONSUMER ELECTRONICS
Revenue Revenue Growth
Source: http://clients1.ibisworld.com/reports/us/industry/industryoutlook.aspx?entid=1024
• Expected revenue: $77.3 Billion in 2015, upswing projected starting 2015.• Annualized growth rate of 1.88% from 2012 to 2018.
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
12 13 14 15 16 17 18 19 20
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Revenue Growth %
12 13 14 15 16 17 18 19 20$65,000
$70,000
$75,000
$80,000
$85,000
$90,000
$95,000
Revenue $ (million)
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INDUSTRY LIFE CYCLE
Maturity• Competition fierce• Reduction in cost is imperative• Increase in Market Share• Continuous innovation to extend
maturity phase
Intr
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Gro
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Mat
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Dec
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TimeTo
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FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: IBIS World
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PORTER’S FIVE FORCES
Power of Suppliers: Strong Substitutes: High
• Heavily reliant on a limited number of suppliers • Improved screen technology rendering screen protectors obsolete
• Weak protection on the intellectual property underlying high revenue products
• Continual product shifts and innovation• Lower buyer switching cost
Barriers to Entry: Low Power of Buyers: High
• Not Capital Intensive• Manufacturing easily outsourced to third parties• Little product differentiation
• Limited brand loyalty• Numerous other competitors to choose from (substitutes)
Competition: High• Many companies offer similar products• Weak patent protection
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
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UNDERSTANDING MARKET POWER
Strengths Weaknesses- Paid down much of their
debt- Product quality meeting
expectations
- Sustaining their competitive advantage and profitability
- Limited number of suppliers
- Continued increase in DSI and DSO
Opportunities Threats
- New acquisitions- New markets, adjacent
industries- Increase in Disposable
Income- Continued innovation in
consumer electronics industry
- Rising cost of raw materials
- Indirect distribution networks
- Greater competition- Limited protection on
intellectual property
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
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RECENT STOCK PERFORMANCE
20 & 200 Day Moving Average Stock Chart
• ZAGG’s stock price has been well below the 200 day moving average since the end of Dec, 2012.
• Currently, there could be a potential upswing in the near future.
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Source: Yahoo Finance
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FINANCIAL ANALYSIS - RATIOS
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
ZAGG, Financial Analysis
Liquidity Ratios2009 2010 2011 2012 2013
Current Ratio 3.48 2.02 3.21 3.14 3.52 Quick Ratio 2.74 1.25 2.33 2.18 2.17 Cash Ratio 0.99 0.10 0.78 0.48 0.45
Profitability Ratios2009 2010 2011 2012 2013
Operating Profit Margin 14.88% 22.08% 15.71% 12.67% 4.99%Net Margin 8.81% 13.04% 9.82% 5.49% 2.18%ROA 17.89% 17.29% 8.69% 7.04% 2.73%ROE (Book Value) 24.35% 32.92% 17.13% 11.69% 3.84%
Solvency Ratios2009 2010 2011 2012 2013
Debt/Assets 0.01 0.00 0.34 0.22 0.10 Debt/Equity 0.02 0.00 0.67 0.37 0.14 Interest Coverage 24.67 69.30 9.31 5.30 19.04
Activity Ratios2009 2010 2011 2012 2013
A/R Turnover 7.04 3.32 2.41 3.58 5.23 Days Sales of Inventory 82.72 169.10 111.23 101.44 122.94 Days Sales Outstanding 51.86 109.99 151.30 101.90 69.81 Fixed Asset Turnover 43.21 50.87 43.04 54.39 43.84 Total Asset Turnover 2.03 1.33 0.89 1.28 1.25
2009 2010 2011 2012 2013TEV 82.92 174.37 263.13 253.58 141.27Tangible Assets/EBIT 15.55% 8.90% 14.79% 14.52% 45.72%EBIT/TEV 6.89% 9.64% 10.69% 13.21% 7.75%
Greenblatt Ratios
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FINANCIAL ANALYSIS – DUPONT
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
2009 2010 2011 2012 20130.00%
50.00%
100.00%
150.00%
200.00%
250.00%
Dupont Analysis
Tax BurdenInterest BurdenOperating Profit MarginAsset TurnoverLeverageROE
DuPont Analysis
2009 2010 2011 2012 2013Tax Burden 61.33% 59.89% 65.12% 60.70% 56.45%Interest Burden 96.56% 98.60% 95.97% 71.36% 77.52%Operating Profit Margin 14.88% 22.08% 15.71% 12.67% 4.99%Asset Turnover 2.03 1.33 0.89 1.28 1.25Leverage 1.36 1.90 1.97 1.66 1.41 ROE 24.35% 32.92% 17.13% 11.69% 3.84%
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VALUATION – WACC
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
WACC Calculation
Capital Structure
Debt-to-Total Capitalization 12.3%
Equity-to-Total Capitalization 87.7%
Total 100.0%
Cost of Debt
Cost of Debt 1.1%
Tax Rate 40.0%
After-tax Cost of Debt 0.7%
Cost of Equity
Risk-free Rate(1) 2.8%
Market Risk Premium 6.3%
Levered Beta 1.97
Cost of Equity 15.0%
ROE 3.8%
Weighted Cost of Equity 11.7%
WACC 10%
Business Risk Premium 5.0%
Discount Rate 15.3%
Zagg’s current debt consists of a revolving credit facility, which was used to pay down long-term notes payable
Zagg is paying an effective interest rate of 1.11% on the revolving line of credit
Business Risk Premium attributed to limited cost of debt, competitive playing field Zagg competes in
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VALUATION – DCF
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Discounted Cash Flows - ZAGGHistorical figures Forecast Figures
2009A 2010A 2011A 2012A 2013A 2014P 2015P 2016P 2017P 2018P
EBIT 5,710 16,813 28,137 33,491 10,946 15,794 17,847 19,631 21,595 23,754
Less: Income Taxes (2,132) (6,650) (9,418) (9,393) (3,695) (5,314) (6,005) (6,605) (7,266) (7,992) Plus: D&A 243 348 5,926 11,559 12,157 13,161 14,872 16,360 17,996 19,795 Less: CapEx (574) (820) (1,590) (2,764) (2,588) (2,994) (3,169) (3,272) (3,599) (3,959) Less: Change in Working Capital: 1,006 (40,921) 25,907 (10,553) 46,434 (416) 16,028 7,664 8,430 9,273
Unlevered FCF 21,063 7,517 24,994 27,493 30,243
Terminal Value = 241,833
Terminal Value Assumption Terminal Growth 2.5% Terminal Value 241,276
Discount Rate 15.3% Present Value of Cash Flows 18,265 5,653 16,298 15,547 14,830
PV of Terminal Value =
118,584 EV = 188,697
Share Price Sensitivity Terminal Growth Rate
WACC
2.0% 2.3% 2.5% 2.8% 3.0%13.3% $6.75 $6.87 $7.00 $7.13 $7.2714.3% $6.10 $6.20 $6.30 $6.41 $6.5215.3% $5.55 $5.63 $5.72 $5.81 $5.9016.3% $5.08 $5.15 $5.22 $5.29 $5.3717.3% $4.67 $4.73 $4.78 $4.85 $4.91
Calculation of Implied Share Price
Implied Enterprise Value $ 189,176 Less Debt $ 17,543 Plus Cash $ - Implied Market Cap $ 171,633
Implied Share Price $ 5.73
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VALUATION – COMPARABLES COMPANY ANALYSIS
FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
COMPANY OVERVIEWCOMPANY
OVERVIEW
STOCK MARKET
PROSPECTS
STOCK MARKET
PROSPECTS
MACRO OUTLOOK
MACRO OUTLOOK VALUATIONVALUATION
Comparables Enterprise Value / Price / Growth Rates Profitability
2012A 2013A 2014PShare Shares Equity Debt/ Enterprise EPS EPS EPS 1 Year Margins
Ticker Price Outstanding Value Equity Value Rev. EBITDA BV Actual Actual Est. Rev. EBITDA EBITDA NIZagg Inc. ZAGG 4.66 31.46 147$ 14.1 141$ 0.7x 4.5x 1.14x 9.5x 19.1x 8.9x -17% -39.3% 15.7% 2.2%Logitech LOGN 25.65 0.65 17$ N/A 1,997$ 1.0x 12.0x 0.90x 11.5x 9.0x 29.8x 3.3% N/A N/A 26.2%Skullcandy SKUL 9.45 27.74 262$ N/A 166$ 1.0x 15.1x 1.90x 8.2x 41.8x 71.3x -29.4% -83.8% 3.8% -1.4%Universal Electronics Inc. UEIC 39.11 15.60 610$ N/A 548$ 1.0x 8.5x 2.17x 15.7x 28.6x 18.4x 14.3% 15.6% 9.5% 4.3%Plantronics Inc. PLT 45.11 43.47 1,961$ N/A 1,604$ 1.9x 9.3x 2.77x 15.3x 18.7x 16.5x 10.6% 2.3% 19.0% 13.9%
Mean 1.2x 11.2x 1.9x 12.7x 24.5x 34.0x 0.00x -0.2x 0.1x 0.1xMedian 1.0x 10.6x 2.0x 13.4x 23.7x 24.1x 0.1x 0.0x 0.1x 0.1x
High 1.9x 15.1x 2.8x 15.7x 41.8x 71.3x 0.1x 0.2x 0.2x 0.3xLow 1.0x 8.5x 0.9x 8.2x 9.0x 16.5x -0.3x -0.8x 0.0x 0.0x
Multiple Statistics Implied ZAGG Share Price
Multiple Zagg Statistics Low Median High Mean Low Median High MeanPrice/Book Value $4.09 0.90x 2.03x 2.77x 1.93x 3.70$ 8.32$ 11.31$ 7.91$ Forward TEV/EBITDA $31.22 8.50x 10.62x 15.13x 11.22x 0.01$ 0.01$ 0.02$ 0.01$ Forward TEV/Rev $212.32 1.00x 1.00x 1.91x 1.23x 0.00$ 0.00$ 0.00$ 0.00$ Forward P/E $0.52 9.00x 23.67x 41.76x 24.53x 4.71$ 12.39$ 21.85$ 12.83$
Multiples Weight Implied Share Price
Price/Book Value 10% 7.91$ Forward TEV/Sales 5% 0.01$ Forward TEV/EBITDA 5% 0.00$ Forward P/E 10% 12.83$ DCF 70% 5.73$ Zagg Implied Stock Price 6.09$
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RECOMMENDATION
Things to Look For• Improved management of inventory levels• Increased brand recognition and product offerings• Stabilized gross and operating margins• Expansion to adjacent markets
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