An Apple a Day Keeps These Companies Alive

Headphone maker Skullcandy (Nasdaq: SKUL  ) and case distributor ZAGG (Nasdaq: ZAGG  ) are just two of the companies trying to capitalize on Apple's (Nasdaq: AAPL  ) popularity. The two sell accessories for iDevices, as well as other manufacturers' products, and both have seen increased sales over the past year. However, only one of these tagalongs has what it takes to succeed.

The apple of my ear
Not everyone loves Skullcandy, and that's a great reason to get interested. There's no better feeling than getting in before investors catch on to a company. The stock currently has 32% of its shares shorted, but the underlying business is thriving.

With more and more people ditching Apple's earache-inducing buds, Skullcandy has carved out a niche by providing alternative fashionable headphones. Customers have responded positively, and Skullcandy's sales grew 45% last year. The company is managed by a diverse team that includes alums from RVCA, BitTorrent, and Panasonic. It has the retail, technology, and fashion backgrounds needed to continue defining the designer headphones niche.

Skullcandy has also made some great marketing moves recently. In the tradition of other successful, youth-focused brands, it's built relationships with a wide range of sports celebrities, including NBA star Kevin Durant, motocross rider Jeremy McGrath, and supermodel Kate Upton.

On the financial side, it grew its gross margin five points to 50%, showing an increase in efficiency. It also managed down accounts receivable to 30% of its assets, due to a stronger position with retailers. With 2012 set be another great year for Apple, Skullcandy has set itself up to ride the wave all year long.

They should have zigged
iPod accessory producer ZAGG is in a boat that looks a lot like Skullcandy's, but ZAGG's boat is full of holes. The company also supports the iWorld, producing skins, cases, and those plastic covers that stop you from smearing jam all over the screen. ZAGG is also disliked by Wall Street, with 32% of its shares shorted.

The products it makes are incredibly useful, so it's no wonder competition is fierce. While Skullcandy also faces competition, the company has managed to carve out a niche in the designer headphone space. Consumers pay a higher price for the look as well as the function. On the other hand, ZAGG's products can sell for more than three times comparable items, and do not enjoy any competitive advantage.

On top of all that, the company is running its finances into the ground. Last year it spent close to $50 million in cash to acquire iFrogz as part of a $105 million deal. iFrogz produces products similar to ZAGG's, so the purchase made sense from a competitive standpoint. Unfortunately, it was ill timed. ZAGG had to take out a $45 million loan and open another $45 million in credit to complete the deal. If the company keeps on spending like that, the ZAGG dinghy is going to slip under the waves.

Snagging a slice of the pie
As Apple continues to grow and release new products, more and more companies are going to try and get in on the action. As investors, we should also be looking to take advantage of good opportunities. Even though neither of these companies is feeling the Wall Street love, Skullcandy is poised to make something of itself. With a strong brand, good marketing, and a popular product, it's got a great outlook. ZAGG, on the other hand, is fighting to stay alive -- and it looks like a losing battle.

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Editor's note: A previous version of this article incorrectly stated the shares short of these companies. The Fool regrets the error.

Fool contributor Andrew Marder has no stake in any of the stocks mentioned in this article. The Motley Fool owns shares of Skullcandy. Motley Fool newsletter services have recommended writing naked calls on ZAGG. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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 April 10, 2012, at 12:25 PM, tcp1130 wrote:

    your figures are off Skullcandy has 27 million shares outstanding and a declared short position of 8.6 million ??

  • Report this Comment On April 10, 2012, at 1:15 PM, investingNideas wrote:

    If you go to http://www.ifrogz.com/ the first thing you see is head phones just like Skullcandy. In fact ZAGG would have bought Skullcandy but iFrogz was cheaper and sells to a younger generation. Skullcandy is still a great buy for ZAGG. With Sony and LogiTech having so much trouble making products, new comers like amazon can walk right in and sell more product then them is a issue worth looking into. Zagg (Nasdaq:ZAGG) has been upgraded by TheStreet Ratings 04/06/12 from hold to buy. Did cramer change his mind and they said the opposite then this article. Check out http://www.investingnideas.com for more info.

  • Report this Comment On April 10, 2012, at 4:24 PM, TMFRedRam wrote:

    Thanks for reading and taking the time to comment!

    @tcp1130

    Thanks much for catching my error. I transcribed the wrong line from my datasheet. Doh. It has now been corrected in the article.

    @investingNideas

    I agree (in part). iFrogz makes excellent stuff and it will probably help ZAGG. I just think the purchase was ill timed. It seems to me like they put themselves in a very difficult cash position that they wouldn't have had to enter if the core business had been up to snuff. This may be the lifeline that they need but I'm not yet convinced.

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