VOXX - VOXX International: Must Remain Profitable To Keep The Market Interested

Summary

• VOXX International Corporation beats earnings expectations in fiscal Q3 2023, despite a poor sales print.
• Gross margin increases in the automotive segment.
• VOXX International Corporation needs bottom line profitability to continue to protect the balance sheet.

Intro

We wrote about VOXX International Corporation ( VOXX ) in November of last year, when we stated that growth was needed in order for share-price momentum to be realized. Well, shares have managed to tack on roughly 17% since we penned that piece as some positive sequential trends in the company's recent fiscal third-quarter 2023 earnings report resulted in forward-looking bottom-line revisions receiving a timely boost to the upside.

The market has already priced in the ramifications of the company's improving financials, as we can see on the technical chart below. As we see below, shares are now trading above the depicted multi-year downcycle trend line, resulting in an upturn (something we have not seen in VOXX for quite some time) of the stock's 200-day moving average. Suffice it to say, the longer price can remain above the depicted trend line, the higher the probability that the lows are in for VOXX stock.

Q3 Earnings

Despite the rough comparable in the recent third quarter (25% drop in top-line sales), investors should focus on how the financials will improve when trading conditions revert to something like we have been used to. In the OEM side of automotive, for example, multiple customers of VOXX continued to face supply chain issues concerning the procurement of their chips. This, as a result, adversely affected their production schedules accordingly.

We just have to look at one customer - Stellantis N.V. (STLA) - to see how its supply chain woes cost VOXX something like $9+ million in revenues in the third quarter alone. Remember, these problems are external in nature for VOXX and should subside once customers return to consistent production schedules.

The aftermarket segment in Q3 suffered from lower foot traffic, but the encouraging trend in automotive was the following. In a very difficult trading period in automotive ($13 million sales decline), pre-tax profit still came in a positive $3.1 million. This number speaks of the very aggressive cost-cutting management has done in recent times in order to maintain profitability. Furthermore, despite the lower volumes in "Aftermarket" as well as the above-mentioned supply-chain constraints in OEM, gross margin in automotive increased sequentially & jumped by 80 basis points in Q3. This trend is really encouraging, given that lower-cost production is already up and running in Mexico.

Value

A rising gross margin metric ties in very well with VOXX's current valuation, which incidentally looks very attractive on the sales and assets side. As long as gross margins can keep on rising modestly (26% approximately in Q3), and result in bottom-line profitability in the process, the market should continue to reward the share price accordingly. We state this because shares at present trade with a book multiple of 0.73 and a sales multiple of 0.48. Sales and assets are the principal drivers of profitability and cash flow, so buying them as cheaply as possible makes sense from a long-term standpoint. The key here, though, (for the above-mentioned valuation multiples to rise over time) is that VOXX continues to maintain its profitability. Valuation multiples become far less significant when the company in question fails to consistently report bottom-line profitability.

Balance Sheet Concerns

Although margins were able to inch up in Q3, the VOXX balance sheet has been getting weaker to reflect the changing market conditions. Total debt now tops $47 million, and inventory came in at $193 million at the end of the third quarter. This means the company's liquidity as well as solvency has been adversely affected in recent quarters, which gives VOXX less scope if a sustained downturn (ongoing supply chain issues and reduced demand) were to continue for some time to come. Management is banking on bringing down its inventory in quick order in fiscal 2024, but it remains to be seen if this will actually take place. Remember, rising debt increases interest expense on the income statement , which means VOXX has to start ahead of the eight-ball and consistently report profitability to keep the market interested here.

Conclusion

Therefore, to sum up, the one shining light in VOXX International Corporation's recent third-quarter earnings report was the rising gross margin metric. This trend is always an encouraging trend in inflationary environments when margins invariably come under pressure. We believe the automotive segment over the consumer segment continues to offer the most upside here. We look forward to continued coverage.

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