This is the second part of iGo’s business valuation. Yesterday we looked at the business and recent events of iGo Inc. Here, we look at other factors affecting the value of the business and its discount to the liquidation stock price.
iGo like any other net net has a risk. The first place to look to understand the risk of the business is the 10-K. The 4 risks below were the biggest but it has all materialized with the loss of Targus as a business partner.
- We depend on large purchases from a small number of significant customers, and any loss, cancellation or delay in purchases by these customers could cause a shortfall in revenue, excess inventory and inventory holding or obsolescence charges.
- Our success is dependent in part upon our relationships with a limited number of strategic resellers.
- We will need to expand sales through distributors and resellers in order to develop our business and increase revenue.
- Increased reliance upon distributors and resellers for the sale of our products will subject us to additional risks, and the failure to adequately manage these risks could have a material adverse impact on our operating results.
Even with the realization of these risks, the stock price today is trading at the same price as it was at the date of the announcement. The stock has been beaten down so much that news such as this, doesn’t seem to affect it at all.
It also helps that the company has a strong balance sheet with plenty of cash, which is also protecting the downside and potential permanent loss of investment capital.
Financial Statement Analysis
When valuing a business for the long term, it is vital to look through a few annual reports, but with net nets, since we are valuing the business at its liquidation price, it is best to compare the latest quarterly reports to see how the company is managing its operations and cash.
Understanding the Balance Sheet
- 2008 Cash and cash equivalents is $26.2 mil compared to $19.6 mil from the prior quarter and $15.9 mil from the previous year. Excellent.
- Short term investments is down from $7.1 mil in the previous quarter to $4.9 mil. Investments have been sold or there has been a loss.
- Accounts receivables reduced to $12.6 mil compared to $16.3 mil in the previous quarter. Excellent. The company is doing well in collecting money from its customers.
- Accounts payable is $7.1 mil compared to $11.7 mil in 2007 and $7.7 in the previous quarter. Excellent job of paying back suppliers.
- Accrued expenses remain steady. Nothing is building up too much which is good.
- I never like to see increases in deferred revenue and it’s good to see this number drop to $412,000 compared to $936,000 in 2007.
- Total liabilities decreased to $10.9 mil in 2008 compared to $11.6 in Q3 and $16.3 in the previous year. Well done.
Understanding the Income Statement
- Seeing as how the economy in Q4 (Sep-Dec) was especially difficult for retailers, I’m surprised that revenues held up well in the last quarter.
- Total revenue was $77.1 mil but remember that Targus made up 42%. i.e. $32.4 mil.
- On similar revenues to 2007, COGS decreased by $4 mil.
- It seems like the company has cut back on everything during Q4. SG&A and R&D have all decreased.
- Net income was positive.
The income statement is impressive but with Targus out of the picture, the past performance has now become irrelevant.
Understanding the Statement of Cash Flows
- Nothing out of the ordinary
- Net cash from operations has been positive in 2008 and 2007
- I expect it to be negative this year
- Effect of exchange rates on cash is larger than usual at $10.2 mil. This isn’t quality cash. Would like to see cash growing from operations not from exchange rates.
- Cash at beginning of period: $15.9 mil, Cash at end of period: $26.1 mil. Still very respectable.
The financial statements show the strength of the company’s balance sheet and their efforts to reduce costs. However,the problem is the impending drop in revenue and how fast the company will use its cash.
With the free investing spreadsheet I created, I was able to quickly enter in some data from the financial reports to value the liquidation price of the business.
IGOI’s stock price is trading at a 43% discount to its liquidation value. A big portion of its assets is cash, the best asset. Even if inventory and receivables is written off to $0 and total liabilities remains the same at $10.9 mil, the liquidation value is still $0.63!
At it’s current trading price, I’m sure competitors, such as Belkin, would drool at the opportunity to purchase the company.
- Easy to understand business
- Loss of largest customer could lead to losses
- Company now seeking strategic alternatives
- Shareholders wanting change
- Balance sheet made up of cash
- Liquidation value of the business is extremely cheap
- Downside is limited
I own shares of IGOI at the time of writing.