VOXX - VOXX International: Assessing How Long Restructuring Will Continue

2024-01-05 15:18:08 ET

Summary

• VOXX has experienced poor profitability in recent quarters, leading to a decrease in share price.
• The company's sales have declined with aggressive cost-cutting measures having become the norm.
• Concerns about the balance sheet, including rising price-to-book ratio and high inventory levels, impact VOXX's financial position.

Intro

We wrote about VOXX International Corporation ( VOXX ) back in February of 2023 when we reiterated the point that the consumer electronics manufacturer needed to remain profitable to keep investors interested. VOXX had just reported in January'2023 $2.3 million of operating profit for the third quarter of fiscal 2023 (Ended November 2022) so we wanted to see this trend continue in earnest. However, the last three quarters have been poor (profitability-wise) with reported negative EBIT of $2 million, $11.4 million & $6.5 million in Q2 of fiscal 2024 weighing on the company's share price over the past three quarters. Suffice it to say (given that earnings growth is the main metric that drives share-price gains on Wall Street), it is not surprising to see shares having lost approximately 13% over the past 10.5 months which is a sizable opportunity cost considering the S&P has rallied over 16% over the same period.

What stood out in that third quarter report last year was how VOXX's customers on the OEM side of automotive continued to experience supply-chain difficulties which in turn hurt their production levels accordingly. Furthermore, the aftermarket segment continued to suffer from lower demand and although management decided to take aggressive action concerning ongoing cost-cutting efforts, poor top-line growth rates continue to put pressure on the financials.

As we see from VOXX's technicals, poor profitability numbers in recent quarters have resulted in lower highs in the stock since April of last year. Given the depicted uptrending lower trendline (although being extremely shallow) since early 2022, one could make the point that a long-term coil is in play which more often than not plays itself out as a continuation pattern (bullish). From delving through VOXX's fundamentals & forward-looking trends, however, we continue to deem VOXX a 'Hold' for the following reasons.

Fiscal 2024 Q2 Trends

Although the company's net sales eked out a slight top-line gain in Q2 , sales of $113.6 million in the quarter still came in some $12+ million lower compared to the same period of 12 months prior. All three segments (Automotive, Consumer, and Biometric) reported declines although gross margin as a whole grew in the quarter. VOXX did report pockets of growth (OEM in the automotive segment as well as CE sales in the Consumer segment) but the worrying trend here is that the company continues to get smaller. In fact, alluding to our comments above concerning management's aggressive cost-cutting actions last year, we witnessed an even bigger restructuring program in the second quarter of this present fiscal year in an effort to bring down costs even further.

This begs the question. Can VOXX grow its sales & earnings consistently going forward in the face of deep cost cutting which now has become the norm? The CEO believes the second half of fiscal 2024 will be better as we see below from his comments on the recent Q2 earnings call.

We expect growth in the second half of the year based on the contracts we have, the new programs we've secured, and both the new products we've launched and will be launching. Of course, we're mindful of any further deterioration in the economy, and we expect markets to remain hard-pressed for the next year or so. If things worsen, we'll take more action, but we believe we have made the necessary adjustments in our business to drive profitability in the second half and to start fiscal 2025 in a more competitive position.

Balance Sheet Concerns

Although value investors will be attracted to VOXX because of its low price-to-book ratio, it should be noted that this key valuation metric has been rising (Trailing book multiple now comes in at 0.72 compared to a 5-year average of 0.58). Suffice it to say, in a deleveraging environment (asset reduction), book value per share goes down if shares continue to consolidate (which we have had in VOXX for quite some time now). To put this in context, shareholder equity has decreased by over $40 million or 11%+ over the past four quarters which is a sizable percentage in a company worth a mere $220 million.

The most glaring line item in VOXX's balance sheet is its inventory which came in at $174.2 million at the end of Q2. Inventory has not been coming down fast enough which is one of the prime reasons why severe cost-cutting initiatives remain the order of the day. Furthermore, the low quick ratio of 0.6 demonstrates how vulnerable VOXX's liquidity position remains in that a sustained deterioration of external trading conditions would mean even more aggressive action to protect the financials over time.

EPS Revisions

Although consensus is expecting a sequential improvement in the company's upcoming Q3 earnings (EPS of -$0.10 expected), earnings are expected to remain in negative territory for some time to come. Therefore are the share buybacks warranted? Wouldn't it be better to use those funds to bring down the debt load and increase liquidity? The recent Gentex announcement concerning new investment would beg to differ on this so time will tell if indeed the below consensus projections turn out to be wrong.

Conclusion

Therefore, to sum up, we are maintaining a 'Hold' rating in VOXX ahead of Q3 due to its struggling profitability, decreasing book value, slugging forward-looking EPS estimates & rangebound technicals. The company continues to be at the behest of external trading conditions which have been adversely impacting liquidity in recent quarters. We look forward to continued coverage.

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