Is ZAGG Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what ZAGG's (Nasdaq: ZAGG  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell ZAGG's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much ZAGG's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If ZAGG's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is ZAGG managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at ZAGG's key statistics:

ZAGG Total Return Price Chart

ZAGG Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue Growth > 30%

631.4%

Pass

Improving Profit Margin

(27.2%)

Fail

Free Cash Flow Growth > Net Income Growth

2,460% vs. 442.6%

Pass

Improving Earnings per Share

252.4%

Pass

Stock Growth (+ 15%) < EPS Growth

16.2% vs. 252.4%

Pass

Source: YCharts.
*Period begins at end of Q2 2009.

ZAGG Return on Equity Chart

ZAGG Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving Return on Equity

(66.3%)

Fail

Declining Debt to Equity

37,150%

Fail

Source: YCharts.
*Period begins at end of Q2 2009.

How we got here and where we're going
ZAGG could be doing better. It earns four of a possible seven passing grades, losing the possibility of earning 2 more points by not paying a dividend. ZAGG may have done a great job at improving its earnings, but it's done a better job improving its revenue, which detracts from its profit margin and its ability to generate high returns on equity.

ZAGG's certainly had a dramatic year, from a big first-half rise to a disappointing third quarter, capped with the resignation of CEO Robert Pedersen, which destroyed the stock's momentum. Like many accessory makers, ZAGG was banking on a huge Apple (Nasdaq: AAPL  ) iPhone 5 release to drive accessory sales. However, as longtime Fool Rick Munarriz points out, Apple has been dipping into the accessory game as well, and touchscreen-glass maker Corning (NYSE: GLW  ) continues to develop harder, lighter, and more durable protective surfaces, which may eliminate the need for ZAGG's plastic defenses.

ZAGG seeks to combat this perception of one-dimensionality through the iFrogz subsidiary it acquired last year, which expands the company's product offerings to compete directly with Skullcandy (Nasdaq: SKUL  ) in higher-end headsets and earbuds, as well as more traditional mobile-device cases. That acquisition brought ZAGG about a quarter of its total revenue and a fifth its net income through the first half of 2012 , which makes it seem like a pretty darn good move in retrospect.

At the moment, iFrogz is generating about a quarter of the revenue and net income of Skullcandy , but ZAGG has product placement deals with both AT&T's (NYSE: T  ) mobile outlets and with massive megaretailer Wal-Mart (NYSE: WMT  ) that should help its numbers (and visibility) grow.

Putting the pieces together
ZAGG has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

ZAGG had a fantastic run from obscurity several years ago, making a few savvy investors a lot of money. Where will the next millionaire-making opportunity come from? The Fool’s dug deep into the market to uncover three great small-cap stocks that Wall Street’s too rich to notice. All the information’s available in our exclusive free report -- click here to find out more at no cost.

Keep track of ZAGG by adding it to your free stock Watchlist.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Corning and Apple. Motley Fool newsletter services have recommended buying shares of Corning and Apple and creating a bull call spread position in Apple. We Fools don't 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. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (8)

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 October 15, 2012, at 11:07 PM, shadowlesstruth wrote:

    The lower profit margin was the result of expanding their product line to include more than the super high margin invisibleshield. This was helpful for revenue growth and reduces their reliance on one product. The ROE dipped and debt to equity skyrocketed because of the iFrogz acquisition, which you claim was a positive thing. Any company growing this fast should NOT be paying dividends. And you don't even mention how much Zagg is above the targets,3 year revenue growth of 630% should not get the same grade as 31%. Your pass/fail grade system is more hurtful than helpful. Also, the latest Corning glass did not get any more durable or harder, just lighter. You have several facts about iFrogz wrong, it did not bring in half the profit and a third of the revenue of Zagg and is not competing in higher-end anything. iFrogz is at the cheap end and Skullcandy has both.

  • Report this Comment On October 15, 2012, at 11:39 PM, TMFBiggles wrote:

    @ shadowlesstruth:

    You're right. The numbers on the iFrogz contribution as printed a bit off, it should be a fifth and a quarter of profit and revenue, respectively. I'll have that fixed. The pass/fail grades have a relatively conservative bar, which is intentional. It's not supposed to be an ironclad statement of quality, just a useful review scheme. A lot of companies don't even make it over the 30% bar.

    - Alex

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