Zagg (ZAGG $5.25) is a leading provider of smartphone accessories. Its main product is the "Invisible Shield" which protects the screens of iPhones and similar devices from scratches and other types of damage. The coverings remain clear despite all the tapping and banging that goes on, unlike competing offerings that tend to bubble, slip, or fog up over time. They generally don't need to be replaced and last as long as the phone does. Zagg got its start selling the shields on its website, mainly to tech savvy customers. Two years ago the company began distributing the products through Best Buy, which remains its largest channel partner. Last year Radio Shack was added. In 2010 Zagg landed its first chain of cellphone retail stores, signing up ATT.
New products promise to reinforce growth. A higher priced covering for the iPad was introduced in the second quarter of 2010. That line appears to be gaining significant momentum. Zagg also launched a line of customized coverings ("Zaggskins") late last year. Customers upload a photo or design to the company's website and the unique result is shipped a day later. Zagg also offers a series of high performance buds (earphones), broadening the overall product line further. In development is a waterproofing application for mobile devices.
Earnings are poised to accelerate. Performance stalled during the second half of 2009 as the company spread itself too thin. A raft of new products were developed in hopes of pyramiding on the Invisible Shield"'s performance. Attention to the core line diminshed somewhat as a result. Marketing efforts were refocused after sales fell below potential during last year's Christmas selling season. Progress became apparent in the June quarter. Sales leaped 63% to $15.1 million in the period, leading to a 50% improvement in earnings (excluding non cash stock option expense) to $.09 a share. Earnings stood at $.12 a share for the entire six months; sales $23.8 million. The second half of the year usually is Zagg's stronger period, due to the Christmas influence. This year incremental boosts from Radio Shack, the ATT stores, and the iPad could provide additional impetus. We estimate full year earnings will finish at $.25-$.30 a share, up 47%-76%, on sales of $53-$57 million (+38%-48%).
Growth is likely to be sustained at a fast clip. Accessories are high margin products for retailers. More chains could adopt the Zagg line in future periods. Sales through existing channels should remain vibrant, moreover, as smartphone and tablet volume continues to expand. In 2-3 years sales could reach $85 million to yield earnings of $.50 a share. Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote. A higher valuation is possible if Zagg establishes itself as the obvious category leader, and the category itself proves enduring. In that case the company would be in a position to leverage its brand name with related products, penetrate more retail accounts, and win greater shelf space. Expansion into foreign markets (international sales already represent 20% of the total) could supply additional gains.