PSB Monthly Issue September 2013

That means we’re likely to see a brand new rush to get the latest and greatest from the world’s most popular smartphone producer.

Last quarter alone, AAPL sold over 31 million iPhones.  For the year, the company’s already sold a whopping 116 million of the ultra-popular devices!

Here’s the thing…

Apple isn’t the only company to benefit from huge iPhone sales.  There are literally hundreds of companies which benefit directly and indirectly from an increase in iPhone sales.

One group of companies which stand to gain directly from a new, popular iPhone is accessories makers.

Smartphone accessories are a big business these days.  Some analysts have the accessories market valued at more than $20 billion.

It includes everything from screen protectors to fancy cases to headphones… and much more.  And of course, with as popular as iPhones are, consumers love to show them off with a full complement of accessories.

And that’s where ZAGG (NASDAQ: ZAGG) comes in.  The company is the leading provider of smartphone accessories for iPhones, iPads, and other popular brands.

THE SMARTPHONE ACCESSORIES BUSINESS

ZAGG produces accessories for mobile devices under two brands, ZAGG and iFrogz. The company has traditionally offered protective coverings, keyboards, keyboard cases, ear buds, mobile power solutions, and device cleaning accessories.

With the acquisition of iFrogz, the company also offers cases, audio amplifying speakers, traditional headphones, gaming headphones, and other gaming-related accessories.

Here’s why we like ZAGG…

First off, the new iPhone is going to provide a huge boost to sales.  The company has been underperforming in recent quarters specifically because there hasn’t been a new, exciting product to attract consumers.

Many customers have been waiting for the next iPhone.  In a few weeks, they’ll get their chance to upgrade.  And, many new iPhone buyers will want to protect their new purchases with ZAGG screen protectors and cases, among other accessories.

And that’s not all…

One of the new features coming out with the new iPhone operating system, iOS 7, is the ability to use game controllers with iPhones (and iPads).  As gaming on mobile devices becomes more and more popular, this new feature could be a huge deal.

Basically, iPhone/iPad owners will be able to use their mobile devices more like mini-gaming consoles.  It really starts to open up the devices to more robust gaming opportunities.

And ZAGG is ready to capitalize off this opportunity with one of their premier iFrogz products.

The product, called the Caliber Advantage, attaches to the back of the phone and slides out on the top and bottom (or the sides when the device is held horizontally) to form a fully functioning game controller.

The Caliber Advantage isn’t cheap.  It’s expected to sell for roughly $60.  But, you can bet it will extremely popular among mobile gamers.

Add the gaming products to ZAGG’s already impressive lineup of industry leading screen protectors and keyboards, and there’s a lot to be excited about.  The new Apple launch is about to light a fire under the company’s sales.

THE NUMBERS

The new iPhone(s) couldn’t come at a better time for ZAGG.  Sales and profits have been lagging with the smartphone market remaining relatively stagnant (as consumers await the new launch cycle).

Last quarter’s revenues were $51.2 million compared to $61.6 million.  And, Adjusted EBITDA came in at $10.5 compared to $15.1 million.  You see, last year during the same period, the iPad 3 came out.  Without a new product to boost sales in this most recent quarter, the numbers suffered.

However, that’s about to change this coming quarter.

What’s more, the company’s balance sheet and cash flow are in good shape.  Not only is ZAGG increasing operating cash flow, but management paid down $15 million in debt last quarter.

The company is holding nearly $14 million in cash compared to $27 million in debt. That’s a reasonable ratio for a growing company.  Plus, current assets are a healthy 3.5x current liabilities.

All in all, ZAGG is in decent financial shape.  But, the income side of things will certainly improve with the new iPhone launch coming in the coming weeks.

INVESTMENT RISKS

As with any investment, ZAGG does have a few risks.

An unexpected slowdown in the economy could reduce demand for smartphone accessories and hurt revenues.

New products from competitors could slow revenues at a time when ZAGG is expecting to ramp up sales.

Finally, if consumers aren’t excited about the new iPhone(s), it could lower demand for ZAGG’s products.

POTENTIAL RETURN OF 115% OR MORE

ZAGG is in perfect position to rebound.  The company’s disappointing revenues and profits are set for a turnaround with Apple’s new iPhone announcement next week. Plus, the company’s new gaming accessories are sure to draw a crowd.

But despite the upside potential, ZAGG shares are trading at just 8.1x projected earnings.  Meanwhile, the industry average price to earnings ratio is a far higher 17.6x.

That means, if ZAGG just trades up to the industry average, the share price could rocket up 115%!

Based on our analysis, we see ZAGG climbing to $9.80 a share or more.  Buy the shares now for potential gains of 115% or higher!

ACTION RECOMMENDATION

BUY ZAGG (NASDAQ: ZAGG) up to $5.00 per share.

Don’t forget your position sizing and stop-loss rules.