Skullcandy Weakness Is 'Overdone,' So Buy In, Says DA Davidson

In a report published Tuesday, DA Davidson analyst Andrew Burns maintained a Buy rating on Skullcandy Inc SKUL, with a price target of $14, saying that the stock weakness reflects “investor skepticism” in view of the “volatile past.”

Despite 1Q being the seasonally lightest quarter, Skullcandy reported revenue upside and in-line EPS. The company also raised its full-year revenue outlook, while maintaining its EPS guidance. Since early May, the company’s shares have plunged more than 25 percent.

Analyst Andrew Burns believes that the share price undervalues Skullcandy’s “favorable growth trajectory” and views this as “a compelling valuation entry point,” since the company appears “capable of achieving 2015 guidance and long-term growth targets (double digit annual revenue growth, double digit EBIT margin).”
In the report Morgan Stanley believes that the pressure on the share price reflects worry around:

• The company’s earnings being backend loaded
• The downward gross margin revision
• “Skittish investor sentiment” given shortfalls in the past

Last year, Skullcandy had a successful listening station reset at Best Buy Co Inc BBY, which represents its largest retailer customer. This drove more than 20 percent y/y growth in the second half of 2014. Skullcandy also had an entry into Wal-Mart Stores, Inc. WMT, ending the year in about 3,000 stores across the US.

“In 2015, SKUL is growing its Walmart store base to 3,600 doors including 1,500 listening stations. Based on store checks, the new listening station displays are a substantial improvement vs. SKUL’s previous assortment…Walmart could grow to be a $30 million account (annually) over the next 18 months,” Burns said.