Market Overview

ZAGG CEO Defends Company after Cramer Criticism

In a Benzinga exclusive, ZAGG's chief executive responds to Jim Cramer's negative remarks. On Friday's Mad Money show, Cramer said, “ZAGG [and Skullcandy] sell ancillary products that are ridiculously easily to duplicate … so there's nothing stopping potential competitors from coming in and tearing either of them to shreds.”

ZAGG.com (NASDAQ: ZAGG), the company most famously known for designing and manufacturing protective coverings, audio accessories, and power solutions for consumer electronic and handheld devices under the brand names invisibleSHIELD, ZAGGaudio, and ZAGGskins, has been making progress this year, inspiring investors to take notice. Initially, at least. In early January, the stock was trading below $8 per share and hit a high in August above $16.

This year, ZAGG has been reporting impressive earnings, in which the company beat analyst estimates for the third quarter quite handedly.

POSITIVES:

ZAGG has to increase its existence in the consumer realm with a new, beefed-up product lineup at retail stores nationwide. The company was one of the first manufacturers to announce a new line of protective accessories designed specifically for Apple's (NASDAQ: AAPL) latest iPhone.

ZAGG experienced record daily sales and record traffic to its website during Black Friday and Cyber Monday. ZAGG sees this as a great sign for overall sales during the holiday season. For Cyber Monday, ZAGG.com saw a 94% increase in sales from the previous year.

NEGATIVES:

However, investors do not seem to believe the hype. Since August, the company faced a bit of a roller coaster, losing approximately half its value. Currently, ZAGG is just above where it started the year at around $8.50 per share.

NEGATIVES, CRAMER'S TAKE:

In recent weeks, former hedge fund manager and CNBC personality Jim Cramer has been very negative on the stock, saying, “When it comes to ZAGG and Skullcandy (NASDAQ: SKUL), don't believe the hype. These two stocks are loved by their analysts who have only ‘buy' ratings on the stocks. However, ZAGG's screen protectors and Skullcandy's headphones are highly commoditized, and anyone can imitate them.”

“The two stocks have come down 50% from their highs, but neither is worth buying. ZAGG's invisible shield produces 50% of its sales, and the two companies are overly dependent on consumer electronics retailers, a segment that is facing headwinds,” Cramer continued. “Both have inventories that are too high, and SKUL saw a 450 point gross margins decline.”

ZAGG CEO TELLS BENZINGA:

Benzinga reached out to ZAGG's CEO, Robert Pedersen, for color on ZAGG's business and Cramer's negative comments.

“We are currently expanding SKU's in Verizon (NYSE: VZ) and AT&T with Verizon recently picking up our ZAGGfolio and AT&T (NYSE: T) increasing SKUs in our invisibleSHIELD and recently carrying the ZAGGsparq,” Pedersen said. “We are increasing SKUs in all major wireless retailers including T-Mobile, Sprint (NYSE: S), USC, and Cricket. The wireless channel has been an important source of growth for ZAGG this year.”

From the last quarter, ZAGG has minor presence overseas, with approximately 7% of its business is in Europe and 5% in Asia.

“ZAGG has continued to expand in these regions with a new facility in Ireland and increased distribution through our partnership with Logitech (NASDAQ: LOGI),” Pedersen continued. “Going forward, ZAGG will look to use the third party fulfillment model to gain exposure to new international markets.”

ZAGG CEO REBUTS CRAMER:

Commenting on Cramer's negative statement on ZAGG's invisibileSHIELD, Mr. Pedersen said, “The invisibleSHIELD is continuing to decrease as an overall percentage of sales as ZAGG continues to develop new innovative products that are now available in large retailers. This includes our ZAGGfolio, ZAGGKeys FLEX, ZAGG Audio and Power products.”

Finally, when asked about ZAGG's increasing inventory, Mr. Pedersen told us, “ZAGG's increase in inventories is greatly dwarfed when compared to increases in revenue.”

On a year-over-year basis from the third quarter of 2011, ZAGG's inventories increased nearly 90% from $18 million to $34.1 million. However, revenue over the same timeframe has increased about 99% from $23.06 million to $45.89 million.

LOOKING AT THE NUMBERS:

When looking at the numbers, the “greatly dwarfed” inventories when compared to revenues decreased only 2 percentage points year-over-year.

In the third quarter of 2010, ZAGG had inventories at $18 million and revenues of $23.06 million; inventories represented 76 percent, when compared to revenues. In the third quarter of 2011, ZAGG had inventories at $34.1 million and revenues of $45.89 million; inventories represented 74 percent, when compared to revenues. Not that much of a decrease.

It's important to remember that the protective cover market is hugely competitive and heavily saturated, so there is risk involved. However, ZAGG has early-mover advantage, but does that really matter in an industry with little barriers to entry?


ACTION ITEMS:

Bullish:
Traders who believe that ZAGG will continue its stellar growth might want to consider the following trades:
  • If ZAGG continues its impressive growth, consider going long ZAGG (NASDAQ: ZAGG), as shares are trading only at a 20x price-to-earnings ratio.
  • If people continue to purchase ZAGG's products, they will likely purchase complementary products for their electronic devices. Consider going long Skullcandy (NASDAQ: SKUL) or iGo (NASDAQ: IGOI)
Bearish:
Traders who believe that ZAGG has many problems with its business model, you may consider alternative positions:
  • If you believe ZAGG has inventory issues and do not believe it can continue its stellar growth going forward, consider going long one of its competitors like Forward Industries (NASDAQ: FORD) who designs, markets, and distributes carry and protective solutions primarily for hand held electronic devices.
  • If you think ZAGG's business is highly competitive with little barrier to entry, consider going long AEP Industries (NASDAQ: AEPI). The company manufactures and markets a range of polyethylene, polyvinyl chloride and polypropylene flexible packaging products used in the electronics industry, among others.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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Posted-In: CNBC Long Ideas News Jim Cramer Short Ideas Management Success Stories Media Trading Ideas Best of Benzinga

 

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