With the economy fluctuating between a glass half full one week and bone dry the next we continue to focus on Value and special situations based upon our equity model. For all practical purposes its impossible to predict where the economy will be in a year, but we do know that this period in our history corporations have rock solid with frequent over capitalized balance sheets (lots of cash, little debt) while the consumer continues to de-leverage from decades of over consumption (which will take years).
Value continues to be exploited in the markets as one of our long term holdings Sports Supply Group has been acquired by private equity firm ONCAP LP, shareholders will be receiving cash in lieu of stock. This marks the third holding of ours in 2010 that has either been acquired, subject of a hostile takeover or considering sale of the company. Asset rich companies make attractive targets since the cash on the books is quantifiable and frequently the underlying business can be acquired for little or nothing. Frequently these companies are the targets for Value investors who love nothing more than predictable and boring companies in sleepy industries with hairless balance sheets.
Present market weakness has pressured the price of Audiovox symbol VOXX to an excellent entry point here at $6.55. VOXX has approximately $330 million in current assets and $118 million in total liabilities which net to $212 million but the market value is $148 million. The $64 million dollar difference with 18.5 million shares outstanding or $3.45 per share is a rock solid Margin of Safety to the patient investor willing to wait for the value to move in excess of the balance sheet. The stock holds the potential for a 50% or more rate of return assuming the balance sheet remains intact.
VOXX has been around since 1965 and makes some of the coolest audio equipment in the world but it isn’t always profitable. Earning expectations for 2010 are in the .35 per share range but the estimate is from only one analyst.
Products are marketed under the Audiovox brand name along with other brands such as Acoustic Research, Advent, RCA, Jenson, Road Gear and Spikemaster.
One aspect that caught our eye was the list of investors who own significant stakes in VOXX: Seth Klarman of Baupost Group, George Soros and Irving Kahn.
We expect owning shares of VOXX to be a long term investment, investors should have a multiyear expectation. It is the type of stock that you could rest easy when you go on that multi-year sabbatical to the Amazon.
Others may want to wring their hands with the potential for deflation, however with investor angst so high at the moment reflects that much of the deflation debate may be baked in the cake of the market for the interim, hence the potential for significant values is quite good.
Be careful out there.
Brad Pappas
Long VOXX