Zagg NASDAQ ZAGG April 3 2014 1 Jason Chan Michael DeRenzo Rodrigo Serna Agenda Introduction Company Overview Macroeconomic Outlook Relevant Stock Market Prospects Financial Analysis Valuation ID: 768106
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Zagg (NASDAQ: ZAGG) April 3, 2014 1 Jason ChanMichael DeRenzoRodrigo Serna
Agenda IntroductionCompany OverviewMacroeconomic OutlookRelevant Stock Market Prospects Financial AnalysisValuationRecommendation 2
Company Overview 3 Founded in 2005 and headquartered in Salt Lake City, UtahDesigns, produces, and distributes mobile and media accessories, namely InvisibleShield Blackrock currently holds 10.75%Mainly produce protective screen coverings under I nvisibleShield brand nameMoving into mobile device peripherals such as headphones, power products, and gaming productsFastest growing market segments are tablet and smartphoneLook 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 Company Overview Stock Market Prospects Macro Outlook Valuation
Company Overview – Management’s Outlook 4 Source: Form 10-K 2013 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation 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
5 Source: http://www.theguardian.com/money/2012/mar/12/family-income-dip-again Disposable incomeProjected sales growth rates in key market segments such as tablets and smart phones Cost of labor in China Cost of raw materialsShift from in-store sales to online sales Potential Product shift through innovation Macroeconomic Outlook – Key External DriversFinancial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation
Industry Overview – Consumer Electronics6 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation 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 demand Keys to Success Innovation (Differentiation) Control cost structure (Low cost leadership) Distribution networks Industry Trends Little to no long term debt Heavy R&D expenditures Preferences shifting to multi-purpose devices
7 Industry Analysis – Consumer Electronics Revenue Revenue Growth Source : http://clients1.ibisworld.com/reports/us/industry/industryoutlook.aspx?entid=1024Expected revenue: $77.3 Billion in 2015, upswing projected starting 2015.Annualized growth rate of 1.88% from 2012 to 2018. Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation
Industry Life CycleMaturity Competition fierceReduction in cost is imperativeIncrease in Market ShareContinuous innovation to extend maturity phase 8 Introduction Growth Maturity Decline Time Total Industry Revenue Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation Source: IBIS World
Porter’s Five Forces 9 Power of Suppliers: StrongSubstitutes: High Heavily reliant on a limited number of suppliers Improved screen technology rendering screen protectors obsoleteWeak protection on the intellectual property underlying high revenue productsContinual product shifts and innovationLower buyer switching costBarriers to Entry: LowPower of Buyers: HighNot Capital IntensiveManufacturing easily outsourced to third partiesLittle product differentiationLimited brand loyaltyNumerous other competitors to choose from (substitutes) Competition: High Many companies offer similar productsWeak patent protection Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation
Understanding Market Power 10 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 Company Overview Stock Market Prospects Macro Outlook Valuation
Recent Stock Performance11 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 Company Overview Stock Market Prospects Macro Outlook Valuation Source: Yahoo Finance
Financial Analysis - Ratios12 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation ZAGG , Financial Analysis Liquidity Ratios 2009 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 Ratios 2009 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 Ratios 2009 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 Ratios 2009 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
Financial Analysis – Dupont13 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation DuPont Analysis 2009 2010 2011 2012 2013 Tax 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 1.25 Leverage 1.36 1.90 1.97 1.66 1.41 ROE 24.35% 32.92% 17.13% 11.69% 3.84%
Valuation – WACC14 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation 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
Valuation – DCF15 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation Discounted Cash Flows - ZAGG Historical 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 $7.27 14.3% $6.10 $6.20 $6.30 $6.41 $6.52 15.3% $5.55 $5.63 $5.72 $5.81 $5.90 16.3% $5.08 $5.15 $5.22 $5.29 $5.37 17.3% $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
Valuation – Comparables Company Analysis16 Financial Analysis Company Overview Stock Market Prospects Macro Outlook Valuation
Recommendation Things to Look ForImproved management of inventory levelsIncreased brand recognition and product offerings Stabilized gross and operating marginsExpansion to adjacent markets 17 W ATCH LIST