ZAGG: Smartphone Accessory Company at ~20% FCF Yield

This post is excerpted from a letter by MOI Global instructor Jim Roumell, partner and portfolio manager of Roumell Asset Management, based in Chevy Chase, Maryland.

ZAGG was created from the concept of applying a clear film originally designed to protect military helicopter blades in harsh desert conditions to protect consumers’ mobile devices. ZAGG designs, produces and distributes professional product solutions for mobile devices, including screen protection (glass and film), keyboards for tablet computers and mobile devices, keyboard cases, earbuds, mobile power solutions, cables, and cases under the ZAGG and InvisibleShield brands.

The company designs product solutions for users of mobile devices, and sells these products to consumers through global distribution partners and online. The company offers products for various market segments of handheld electronic devices, including smartphones, tablets, notebook computers, laptops, gaming devices, global positioning system (GPS) devices, watch faces, and similar devices and surfaces. Its other brands include mophie (power management and power cases) and BRAVEN (rugged Bluetooth audio). ZAGG has a #1 market share in screen protection (52%), #1 in battery cases (64%), #1 in external power and #2 in wireless charging (24%). Its products are distributed through big box retailers (e.g., Best Buy) and wireless carriers (e.g., AT&T), who like the higher margins of accessories.

ZAGG has made several acquisitions over the past few years. These acquisitions will move the company towards its stated revenue goal of $1 billion. For reference, revenue for 2018 and 2019 is estimated to be $535 million and $620 million, respectively. Management has stated that future acquisitions will be tuck-ins with revenue less than $50 million and also will be accretive within the year of acquisition.

One key acquisition was mophie. ZAGG acquired mophie in March 2016 for $62 million (adjusted for negative working capital). Integration was difficult. In 2017, ZAGG management replaced mophie’s entire senior management team. Additionally, mophie did not get certification from Apple to incorporate new wireless charging in its Power Cases until November of 2018, which caused a 60% decline in sales for that product. ZAGG management has confidence in the mophie division going forward.

A year ago, ZAGG’s stock price was over $21 per share. In addition to the questions surrounding mophie, the company faces competition at lower price points, particularly in screen protection, which represents about 60% of revenue. The share price also reacted to the news of a slowdown in iPhone sales. Of course, there is also a risk that smartphones of the future will not need screen protection, although that appears to be several years out if it occurs at all. Moreover, if this long-rumored prediction does occur, it’s likely to affect only higher-end, more expensive phones.

In the 4th quarter, we spoke with ZAGG CEO Chris Ahern. Mr. Ahern recently replaced the former CEO who retired. Mr. Ahern was the chief architect in turning around mophie as well as international sales. When speaking about M&A, he stated that ZAGG already has the infrastructure in place for $1 billion in sales. We believe Mr. Ahern has the right strategic vision for ZAGG. Management appears to be an astute capital allocator and has repurchased significant amounts of stock.

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Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.