By Ryan Fuhrmann, CFA
Every now and then, I like to test my security-analysis skills by investigating a company with little or no Wall Street coverage. Devoid of any opinions that might bias my own take on a stock, I’ve got to rely solely on SEC filings, press releases, and other information. That’s the case with Milwaukee-based Koss (Nasdaq: KOSS), a $100-million-market-cap headphone and related-accessory marketer and producer. It’s got no analyst coverage and appears to lack an investor relations department, but its recent growth has been loud and clear.
Koss has logged impressive results for at least the past two quarters (Q2 and Q3 in the company’s new fiscal year). After recording strong growth in the second quarter, Koss topped it off with a 35% increase in sales and a 69% increase in net income for the third quarter. Diluted EPS grew 74%. Sales in Europe have been robust, accounting for most of the company’s strength. They’re up 88% so far for the nine months of the current fiscal year. Export sales represented 28% of the total for the last fiscal year, and they’re increasing as a proportion of the total. Overall sales for the past four quarters represent the strongest in Koss’ history, according to the company.
However, because of its considerable recent good fortune, Koss believes it will be hard to top this performance for the next fiscal year. Management doesn’t offer quarterly or annual guidance, and with no formal coverage, there are obviously no consensus estimates to help determine how things will shake out. That sounds to me like a great opportunity for an independent analysis, employing a few Foolish principles.
Koss clearly can’t grow much longer at its current rapid pace. Thanks to its recent impressive results, the stock has had a nice run over the past six months, from about $17 to a recent $27. But even with the strong share performance, Koss trades at a P/E just less than 18 and sports a dividend yield of about 2%.
I don’t usually recommend buying shares after such a strong run over a short period of time, but because of the relative illiquidity of the shares, they tend to fluctuate a bit more than other companies’. The day’s range for the Thursday after earnings were released was $24.67 to $28.49. Koss shares can frequently be found trading at more compelling prices in the low $20s.
Among other merits, Koss has a straightforward business and consistently high returns on capital Â– near 25% on average over the past five years. It’s debt-free, and it’s currently growing rapidly in Europe. Average net margins are also decent, near 13% over the past five years, and the company frequently repurchases common stock its with excess cash flow.
Koss’ risks include a concentrated customer base. Wal-Mart(NYSE: WMT) represents about 15% of sales, and the top five customers represent close to 40% of sales. Koss is also not a very large company, with only about $40 million in annual sales, and its results can stagnate for extended periods of time. In addition, the company’s lack of analyst coverage leaves Fools fewer data points from which to glean possibly useful insights.
It’s difficult to pinpoint how well sales or earnings will grow over the next couple of years. Koss doesn’t churn out double-digit sales or earnings growth as consistently as it has in recent quarters, but it’s solid nonetheless and conservatively run. The next time there’s a hiccup in its growth, I’d consider picking up some shares. Over time, Koss has proved itself to be a worthy investment.