VOXX - VOXX: Share Price Momentum Needs Sustained Growth To Follow

Summary

• Company reports an operating loss of $10 million in Q2 due to a contraction in topline sales and gross margin.
• Automotive and consumer segments experience headwinds.
• Momentum, though, in the share price has been excellent over the past three weeks on strong volume.
• Shares need to rally above the August highs to bring the multiple bottoming pattern into play.

Intro

We wrote about VOXX International Corporation ( VOXX ) on multiple occasions in late 2021 when we were bullish on the company at the time. In the December piece, for example, of 2021, shares had successfully tested their recent lows, had ample insider buying and were just off the back of an excellent free cash flow generated number in its most recent second quarter at the time. Sales were increasing significantly and were not expensive by any stretch of the imagination. Furthermore, VOXX's financial strength, which was evident in the balance sheet, meant that management could use its cash flow aggressively to build the company over time. However, as we learn below, we were out on our timing with respect to that buy recommendation.

Fast-forward 10+ months or so, and we see that shares are down roughly 8% from the $10.26 price point at the time of writing that piece in December of last year. As we can see from the chart below, shares finally lost support in April this year before registering a bottom just north of $6 a share on May 11th. In saying this, given the very strong volume profile in VOXX over the past six months or so, shares look to be undergoing a triple or multiple bottom formation, with the recent August highs of $10.17 per share being the highs of the pattern. Suffice it to say, the attractiveness of this pattern is its height ($4+), which means if the above-mentioned highs can be taken out on strong volume, it would stack the odds in favor of a bullish move to the upside in this play. Share-price momentum since the announcement of the company's second quarter earnings has been breathtaking, to say the least. Nevertheless, sustained improvement in the areas below will be needed to drive shares above overhead resistance in this present rally.

Automotive Headwinds

When it boils down to it, shares will only keep rallying if indeed the growth is there to support it. Although VOXX's forward sales multiple of 0.39 remains very low, growth stagnated in Q2, with both the automotive segment as well as the consumer segment reporting negative sales growth compared to the same period of 12 months prior. Although the OEM side of the automotive segment has been holding up well (down $1.2 million in the first quarter), the availability of chips continues to adversely affect the numbers. VOXX continues to be awarded new business in OEM , but the market wants to know how quickly this business will be done. To alleviate the slowdown, management has been proactive in moving some production lines to Mexico as well as providing alternative chips to select customers in order to meet demand.

The aftermarket side did not hold up as well in Q2, reporting a drop of $7.4 million for the quarter. This was due to lower activity among consumers, compounded by the clear lack of product in car showrooms. Management is expecting a seasonal increase in sales over the next few quarters, so it will be interesting to see if indeed the next few months can be fruitful for the aftermarket segment.

Consumers Not Spending

The consumer segment dropped by $8.9 million, with retail foot traffic as well as e-commerce activity down over Q2 last year. Reduced consumer discretionary spending was offset in the quarter by strength in Onkyo and Pioneer products. Although management pointed out the "non-essential" nature of the company's products in these segments, investors must remember that there is plenty of scope for growth for the likes of Pioneer, Integra, and Onkyo in international markets.

Bleak Near-Term Growth Rates

Suffice it to say, if present external trading conditions continue, near-term growth rates look pretty bleak. In fact, if we look at what consensus is expecting for the upcoming third quarter, for example, we see that the earnings estimate has dropped pretty significantly to $0.16 per share with the topline estimate also contracting to just under $170 million. Insider buying remains very aggressive, but it will be interesting to see if investors continue to buy this name if both forward-looking earnings and sales estimates continue contracting meaningfully. Unfortunately, in this regard, VOXX is at the behest of economic conditions as well as the supply chain. Management can continue to cut costs aggressively to reflect the new paradigm, but the market will most likely need to see a return to some type of growth before it can entertain any ideas of pricing shares well above overhead resistance.

Conclusion

When one goes under the hood of this company, we see plenty of runway for growth in the likes of Onkyo and Pioneer as well as fresh OEM programs. The problem with VOXX though is more external in that can it get its costs down to a level where it can consistently report a profit in a difficult trading environment. Management expects positive profitability in the latter half of this fiscal year. Let's see if this can be realized. We look forward to continued coverage.

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