Do You Hear the People Sing?
Singing the song of "woah this company looks pretty cheap, and its performing well too??"
In this frothy market, I am constantly looking for something that is not trading at a valuation which would make even the Jim Cramer-est of investors blush. And that is hard to do. I found a few gems - $MO at $35, $TAP at $35, but even those laggards have recovered (along with small caps and financials) in late 2020 and 2021, and the deals seem to be fewer and farther between.
Enter an under-covered and underappreciated stock trading at a 12.5x trailing (22x forward, we’ll get into that later) P/E, 1x EV/TTM sales, 7x EV/TTM EBITDA, and it’s not even some boring coal miner or tanker - it’s in an industry that had COVID and other tailwinds in 2020, but should be able to build upon that success in the future.
The Company?
Turtle Beach Corporation ($HEAR), a maker of headphones and computer accessories.
I found HEAR during the meme-stock craze of early 2021 as a similar (but far less fundamentally attractive) company, KOSS, meme’d its way from $4/share all the way up to the $60s before falling back to the teens today. I know that I’m not a good enough trader to actually play something that’s already caught fire, so instead I looked for the “next” KOSS, and found HEAR, which is actually a shockingly fundamentally sound company.
HEAR has been in business since 2010 (at least in its current incorporation). As shown in the chart below, it arrived to some fanfare, took on a bit too much debt, perked up again in 2018, fell back towards lows on the COVID crash (without people realizing that it could be a beneficiary - if only it had been on my radar back then, sigh) and since has returned to ~its 2018 highs, around $30/share.
To provide a bit more information on where we are today:
For full year 2020, HEAR generated about $2.40/share EPS, blowing out analyst expectations in 2 of the 4 quarter, driven by both the video game console refresh cycle (they make gaming headsets) and work/learn-from-home during COVID (people use the same headsets and the other accessories that they make for the endless zoom calls we are all forced to endure).
Analysts have pretty muted expectations for this year, expecting a return to normalcy and the end of the bump from those factors. And hey, they might be right, I only found out about it a few months ago and hoped it would meme to the moon (which it didn’t, but I’m still up a bit from my purchase at ~$24).
I think there’s a solid chance that HEAR will surprise to the upside this year as they did last year. While I hope that COVID is largely in the rear-view mirror, lots of the trends of 2020 should continue to provide some tailwind - partial work from home arrangements, zoom classes during snowdays, lapsed gamers continuing to game more than they used to, etc. Continued government payments to individuals is expected to increase consumer spending across all facets of the economy - why not computer and video game accessories too?
And as I begun the article, even if you split the baby between 2020’s numbers and 2021 forecasts (which, gut feeling, look a little bearish to me), this is still a cheap stock in today’s market. A 22x forward PE is not at all out of line for a company like HEAR and if they end up surprising positively and EPS is closer to $2/share, they should earn a market-standard multiple in the 20s and should run from here. Even if they only earn the $1.33 estimated by analysts, they’re still not expensive by any standards.
Better yet, they repaid all of their debt and have $50 million ($3/share) in cash.
So how to (theoretically) play it (as always, this is never advice):
HEAR reports Q1 earnings on May 5th and I certainly have no insight to suggest that going in bigly beforehand is a wise decision - and there is certainly uncertainty out there as to whether chip shortages may have affected them, whether holidays pulled forward sales (and reopenings further dampened them), etc. I’m keeping on my relatively small position that has a bit of breathing room, but if I was on the sidelines, I would not initiate more than a quarter or half position ahead of ER.
But over the long term it is one that bears watching and perhaps investing. If they can put up good numbers this year (i.e. continue to trade at <10x EV/EBITDA), they’ll be a target for a PE or strategic acquisition at a healthy premium (or eventually enjoy multiple expansion in the public markets). If they don’t, sure the stock might go down a bit, but you are not paying 50x sales for something here - the margin of safety is far in excess of most stay-at-home/tech-related plays.
Thanks for reading,
Elmer