Speculative Electronics Stocks

Nov 30th, 2006 | By Craig Walters | Category: Investing Strategies, Technology

Wireless communications networks have given birth to the cell phone industry, and Blue Tooth has severed the cords from our headsets to the phones. The only cord that’s left has become a major source of irritation — the power cord.

Until someone comes up with a commercially successful method of wirelessly distributing electricity, we’re going to be charging our mobile devices with something connected to a cord.

It really shouldn’t be that way.

In Colorado Springs back in 1899, Nikola Tesla demonstrated that you could wirelessly transmit millions of volts without electrical lines. In fact, he sent 100 million volts through the air, lighting up 200 light bulbs and a motor. If this piece of history is hard to imagine, it is dramatically presented in the recent film The Prestige, in which Tesla is a character.

Mystery has always surrounded the wireless transmission of electricity. J.P. Morgan backed Tesla’s invention, spent millions building transmission facilities…only to walk away from the investment and the facilities destroyed. More recently, a small upstart company in 2002 began marketing their ideas for wireless chipsets that could receive electricity to charge cell phones without the use of a power cord. After a lot of press attention, the story went quiet and the company’s website now redirects you to an Internet backbone provider.

So, for the time being, we’re stuck with power cords for every portable device we want to charge. But at least one company has come up with a better charger. The company: Mobility Electronics (MOBE: NASDAQ). Their device: The iGo power adapter.

The iGo line of chargers bills itself as an all-in-one way of charging all of your portable devices. So, if you’re on a trip and your lugging a laptop, a cell phone, a PDA and an iPod, you only need this one charger to charge them all.

The device is getting rave reviews. And while it has a high level of utility, it’s pretty sleek looking, too.

Mobility Electronics is not a one-trick pony, though. They were a part of Energizer’s new push for inexpensive battery-operated chargers for cell phones and hand-held video games.

It seemed like a great deal for both companies — Mobility Electronics builds a device that’s distributed at Wal-Marts and drug stores everywhere, and Energizer gets a product that has a voracious appetite for its own batteries

Oh, yeah — Mobility also forged a deal with Dell to produce A/C adapters for their laptops.

This seems like a dream company, doesn’t it? Well, er, now it kind of is a dream…

Two months ago on October 6, Mobile preannounced its upcoming results for the third quarter. Management said that they expected 3Q06 sales to be about $2.5 million below what Wall Street was looking for. And if that wasn’t enough of a shock to the Street, management also said that the Dell relationship is coming to an end, and their Energizer relationship is not expected to bare any fruit going forward in the form of sales for Mobility.

Mobility’s shares, which had previously traded in a fairly tight range, retreated back to their mid-2003 levels:

OK, Mobility is losing some major revenue sources and strategic alliances, but is this really a bad company?

MOBE has a market value of $107 million, and 19.2% of that value is cash it has on the balance sheet. It also has zero debt, making the balance sheet look pretty spotless. And right now, the company has only about $1.1 million in employee stock options.

For its 7-year public history, Mobility has averaged 20.4% average sales growth each year, giving it a very strong top line. And gross margins, despite a drastic dip in 2001, have largely stayed in the high-20% to mid-30% range:

But that’s where this story kind of falls apart. High annual selling, general, and administrative expenses have made this company unprofitable right from the start. Only last year did the company ever turn an annual profit, however the trailing 12 months after 3Q06 look to be a disaster once again:

While this isn’t an ideal investment for Small-Cap Strategy Report or Small-Cap Insider, I do think it makes for a pretty good speculative buy.

Let’s look at the facts…

First, there have been some insider buys lately, in fact, by an extremely loyal buyer who has been picking up shares for several months — Adage Capital. And they have been accumulating blocks at prices much higher than levels today:

Adage now holds over 7 million MOBE shares, or just about 22% of the shares outstanding.

Second, Mobility makes several great power charger products that are in demand. On top of that, their designs seem pleasing to the eye as well as functionally effective, and the bulk of the reviews we’ve read from reputable sources have been very favorable.

Third, this is a small company, but the balance sheet is just about pristine. And it has a proven ability to grow sales at a fairly strong rate. Plus, it’s small enough to be a takeover candidate by just about everyone. It’s float of 27 million shares on 31 million outstanding make the chances that it’ll be swallowed up at a possible premium a real possibility.

Fourth, it may be losing Dell, and the Energizer relationship may not have delivered on its potential, but Mobility’s products are being sold in some of Cingular Wireless stores in the southwest United States, with the possibility that the pilot program could be greatly expanded. Punch up BestBuy.com and the iGo products are there. Same with Amazon.com. The company’s distribution channels are clearly strong.

And fifth, while MOBE is a risky play, we won’t be paying a lot for it. It’s trading at 1.9x book value and 1.1x sales.

Remember, this is a speculation on Mobility gaining traction with Cingular or a possible buyout. The only thing offering us a little bit of downward protection is Adage Capital buying up lots of shares. In fact, their second-largest buy was done at levels similar to today.

Mobility could be a profitable end-of-year surprise for your 2006.

Until next time,

Craig Walters
November 30, 2006

Craig Walters

Craig Walters spent years entrenched in the investment industry doing what he loves best: performing financial research on scores of small-cap companies. Craig was formerly an equity analyst and Systems Director for Ferris, Baker Watts.

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