Cobra Industries (COBR) announced their second quarter results today. I bought COBR in February 2005 because they seemed really undervalued (based on Price/Book and Price/Earnings ratios). They make CB radios, 2-way radios, radar detectors, and are starting to make handheld GPS devices. Cobra owns around 60% of the CB radio market, 20% of the 2-way radio market and 60% of the radar-detector market. They’ve just started in the GPS market and their major product, the NavOne 3000, seems like a flop so far.
This quarter, their revenue and earning were way up and the stock price jumped 25% today (Woo hoo!). I listened to the conference call and here are my thoughts.
- Revenue up 34%, especially from Radio Shack and Walmart. Demand seems good through the rest of this year.
- Gross margin was down slightly because some retailers were experiencing high demand and were running out of product, so they had to specially ship extra inventory, at a higher freight cost. Margins should return next quarter.
- Current GPS device (NavOne 3000) was not well received, partly because it didn’t have a touch screen. Management says they identified this shortcoming initially but that the cost of developing a touch screen through their vendor at the time was too high. Now they realize that it’s important. Makes me wonder about their product development skills, but I’m also glad to see the honesty and the learning process.
- New GPS device (NavOne 4500, due out this quarter) will have real-time traffic info for 45 metro areas (covering 2/3 of US population). It’s apparently the only device currently on the market to have that.
- Accounts receivables were up compared to same time last year, but are down from end of year 2004. It’s not much out of line with increase in revenue.
- No debt
- Book value is now over $10 per share. Even after the run up today, the market price is still below book value.
- Cash is up. You’d think this would be a good thing, but whenever a company starts piling up cash, they start talking about … acquisitions. Management wants to take advantage of their current distribution channels with a new product. They don’t think there is much room for internal growth. Acquisitions are troublesome, because they’re difficult to do properly and because there’s so much management incentive to do them. In addition, it’s difficult for the outside investor to see how an acquisition is really doing. I’d rather see them doing a dividend or a buyback and focusing on internal growth.
- Share count did not increase this quarter. This is so rare to see these days. Almost every company seems to be doling out options, thus diluting current shareholders out. It’s even worse to see them doing this when their market price is so low. I’m happy to see that COBR didn’t dilute (at least this quarter)
- SG & A decreased as a percent of sales. Sarbanes-Oxley compliance costs should decrease next quarter and beyond. Sarbanes-Oxley is the new post-Enron/WorldCom legislation aimed at keeping companies honest. It’s apparently quite cumbersome and expensive, especially for small public companies. Thus, the rationale for the next item…
- Management responded to an analyst who suggested the company should be taken private by saying, “We understand your rationale, but this isn’t the appropriate place to talk about it.” (paraphrased). It sounded to me like management agrees, but I’m still a newbie at these conference calls.
- Company stated that a buyback may be a good idea, but they want an acquisition first.
- I liked the “feel” of the management team from the conference call.
I bought COBR around 7.50, so the 25% pop puts me nicely into the green. The acquisition issue is a red flag and I’ll definitely analyze that data once it’s available, but for the moment I’m holding.