Does ZAGG Miss the Grade?

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Margins matter. The more ZAGG (Nasdaq: ZAGG  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong ZAGG's competitive position could be.

Here's the current margin snapshot for ZAGG over the trailing 12 months: Gross margin is 45.4%, while operating margin is 16.3% and net margin is 8.3%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where ZAGG has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for ZAGG over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 73.9% and averaged 64.2%. Operating margin peaked at 22.2% and averaged 4.4%. Net margin peaked at 13.1% and averaged 2.5%.
  • TTM gross margin is 45.4%, 1,880 basis points worse than the five-year average. TTM operating margin is 16.3%, 1,190 basis points better than the five-year average. TTM net margin is 8.3%, 580 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, ZAGG looks like it is doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at ZAGG? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2012, at 12:02 PM, thku4grace wrote:

    Apparently, Motley Fool misses the grade. How many negative stories have they written about this stock? Clearly, they're attempting to keep it on a downward slope. Just cover your shorts guys.

  • Report this Comment On January 16, 2012, at 1:23 AM, analystinCA wrote:

    This is shoddy reporting. There isn't any mention of the acquisition of iFrogz or the fair value write-up of the acquired inventory and its effect on gross margins. Come on, if you don't know how to read financials or do adjustments then get some help. Zagg reported 3rd qtr gross margins of 49% after adjusting for the inventory write-up. All you had to do was read the earnings press release. This makes your trend line a lot flatter than shown.

    Zagg has had phenomenal revenue growth over the past four years. The majority of this growth has come from adding large retailers such as Best Buy and At&t stores. Zagg explains in is annual and quarterly reports that lower gross margins are from increased indirect sales (big retailers) as a percent of its revenues and a shifting product mix (Zaggfolio) with lower margins. Declining margins usually aren't a good sign, but in this situation it makes sense. In this case it isn't a sign of losing market share, as Zagg's revenue growth obviously shows. I would gladly take 100% YoY sales growth in exchange for slightly lower margins. The author some how thinks that everything would be better at Zagg if it had 5% revenue growth and maintained its 2008 margin levels. There's a trade off for growth and in this case its worth it.

  • Report this Comment On January 17, 2012, at 5:05 PM, naughtyguy wrote:

    The author wrote: "With recent TTM operating margins exceeding historical averages, ZAGG looks like it is doing fine."

    But is it worth the high market cap? What does their obsolete inventory look like?

    Personally, I think I would be a buyer of this stock at about $4 share.

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