There’s no stopping the ZAGG Inc (NASDAQ:ZAGG) growth train, with analysts forecasting high top-line growth in the near future. Over the past three months, the share price has been relatively stable, hovering at US$11.40 the time of publishing. I’ve been impressed with ZAGG for a while, with strong operations led by Chris Ahern. In this article, I’ve written a brief commentary on the key things you’d need to believe in order to be long ZAGG.
Firstly, a quick intro on the company – ZAGG Inc, together with its subsidiaries, designs, manufactures, and distributes mobile tech accessories for smartphones and tablets in the United States, Europe, and internationally. Started in , it operates in United States and is recently valued at US$321.75M.
There’s no doubt ZAGG is delivery on its promises, with a soaring annual revenue growth of 29.27% . Over the past five years, revenue has risen 15.42%, boosted by previous years of higher capital expenditure, which most recently reached US$5.77M. An expected return on investment of 16.70% over the next three years is a result of ZAGG’s reinvestment into the business, according to the consensus of broker analysts covering the stock. Net income is expected to grow to US$38.08M over the next year, and over the next five years, earnings are predicted to rise at an annual rate of 15.90% on average, compared to the industry average rate of 11.95%. These figures illustrate ZAGG’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. ZAGG’s balance sheet is robust, with high levels of cash generated from its core operating activities (0.91x debt) able to service its borrowings. Furthermore, ZAGG’s debt level is at an appropriate 27.50% of equity and has been declining over the past five years from 37.18%. ZAGG also generates a sufficient level of earnings which amply covers its annual interest payment 19.44x. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward. ZAGG has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. ZAGG has managed its cash well at a current level of US$24.99M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
The current share price for ZAGG is US$11.40. With 28.22 million shares, that’s a US$321.75M market cap – quite low for a business that has has a 5-year free cash flow cumulative average growth rate (CAGR) of 17.76% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$48.20M, the target price for ZAGG is US$27.58. Therefore, the stock is trading at a discount. However, comparing ZAGG’s current share price to its peers based on its industry and earnings level, it’s overvalued by 37.40%, with a PE ratio of 21.14x vs. the industry average of 15.38x.
ZAGG’s investment thesis is a positive one. I’m attracted to the company because of the growth story, the possibility that it is yet to be factored into the share price, and the strong capital management. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.