This past December, Voxx International (Nasdaq:VOXX) changed its name from Audiovox to better reflect the scope of its business, which goes much beyond its legacy audio systems. Audiovox first came on my radar in January 2010 when I recommended its stock based on the diversification that was happening in its business. More than 29 months into the transformation, Voxx International is doing great. On May 14, it announced excellent fourth quarter results. The next day its stock jumped 19% to $13.74. However, the momentum didn't last, dropping about 33% since and providing investors with a great buying opportunity. It's priced to move.
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Business Strategy
Take a look inside Voxx International's 2012 10-K and you will see it has a seven-point plan for its business. I'm not going to cover all of the points, but I will address three where the company is doing an excellent job.


  • Although it's the last of seven points, Voxx's desire to improve bottom-line performance and generate sustainable shareholder returns should be at the beginning, based on its success. In recent years, its move to higher-margin product categories has resulted in higher gross margins and overall profitability. In fiscal 2012, gross margins improved 660 basis points to 28.7% and 930 basis points since I first recommended it back in January 2010. By continuing to grow its gross margins and leveraging its fixed overhead costs, its operating margin in fiscal 2012 was 6.2%, several hundred basis points higher than any other year in its history. In fiscal 2013, Voxx expects to generate EBITDA of $62-$65 million, an improvement of at least 15% year-over-year.



  • In the past two fiscal years, it has made two game-changing acquisitions as part of its move to higher-margin product categories. In March 2011, it acquired Indianapolis-based Klipsch, a high-end loudspeaker company for $167.1 million or 6.7 times EBITDA. Voxx borrowed $89 million, in addition to $78 million in cash to pay for the deal. Klipsch generated $170 million in sales in fiscal 2012 and is the primary reason it boosted its gross margins in 2012.

    Because of the acquisition, it is now the number one high-end loudspeaker company in the world. The second acquisition came on March 14 of this year when it paid $112 million for Germany's Hirschmann Car Communication, a leader in the field of car communication and infotainment solutions for the automotive industry. With revenues of $199 million in 2011, it has excellent working relationships with BMW, VW and Daimler. More important is the fact both deals provide Voxx with manufacturing capabilities it hasn't had up till now, which ultimately will lead to even stronger margins.

  • The last point I'll cover is Voxx's intention to capitalize on niche products and distribution opportunities in its target markets. Voxx, up until these latest two acquisitions, manufactured very little. As a result, it was and still is very much a supercharged distributor of mobile electronics, consumer and accessory electronics and high-end audio categories.

    As it selectively develops new products in mobile electronics as well as acquiring niche businesses in the field, it will depend less and less on its accessories business, which generate lower margins and whose revenues have flatlined since 2007. Voxx's success will ultimately come from electronics that stand out in the marketplace. It's got some great brands and now it simply needs to take advantage of them.


SEE: What is the difference between an acquisition and a takeover?

Financial Position
Free cash flow was something that impressed me about the company back in fiscal 2010. It finished 2010 with $23 million in free cash flow, which was slightly more than net income. In 2012, its free cash flow was 105% higher at $47.2 million, 1.8 times net income. I'd expect it to generate somewhere around $55 million in free cash in fiscal 2013, meaning it will have plenty to pay down debt taken on for the Klipsch and Hirschmann acquisitions. Finishing fiscal 2012 with $38.5 million in total debt, the Hirschmann deal added another $111 million for a revised total of $148.5 million. If it pays down $50 million as it did in 2012, it will finish 2013 with less than $100 million in total debt and a debt-to-capital ratio of just 18%. Given this scenario, it wouldn't be surprising if it made another $100-$200 million acquisition between now and next February.




Voxx International and Peers





Company


EV/EBITDA


Voxx International


4.4


Panasonic International (NYSE:PC)


5.8


Phillips (NYSE:PHG)


5.9


Sony (NYSE:SNE)


2.5









The Bottom Line



At the end of fiscal 2010, Voxx International had an enterprise value 5.3 times EBITDA. Today, it's less than that at 4.4 times EBITDA despite possessing a business that's far more profitable and building for an even better future. It's easily a $15 stock by the end of the year and much more in 2013 and beyond. Its stock is definitely priced to move.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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Tickers in this Article: VOXX, PC, PHG, SNE

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