Tic-tac-toe, investors want to know: After reporting two consecutive "earnings misses" in its last two quarters, will consumer electronics (CE) firm Audiovox (NASDAQ:VOXX) make it three in a row when it reports its fiscal Q3 2006 numbers Tuesday afternoon?

What analysts say:

  • Buy, sell, or waffle? Just one analyst follows Audiovox, rating the stock a hold.
  • Revenues. Estimating quarterly sales at $148.8 million, the analyst predicts 6.6% growth.
  • Earnings. In contrast to last year's Q3 loss, a $0.15-per-share profit is predicted.

What management says:
In the middle of last month, Audiovox announced a deal to acquire rival Thomson's consumer electronics accessories business for $50 million, along with the rights to use the storied RCA brand name on these products for an additional, unspecified fee. According to Audiovox, the deal will add as much as $150 million in annual sales, and should be accretive to earnings in fiscal 2007.

Even better, reading between the lines of CEO Patrick Lavelle's statement in the press release, it sounds like the accessories business Audiovox will be acquiring offers higher operating margins than Audiovox's existing CE products. Lavelle also noted that the scalability of the business, which complements Audiovox's existing business, will continue to help improve the firm to "gain maximum efficiencies" (and no, I don't necessarily know what that means, either, but I think he meant it in a good way).

What management does:
As noted by Lavelle, Audiovox has been doing a fine job of improving its operating profitability in recent quarters. And by "improve," I mean "stop losing money." From the following table, however, this seems to owe more to gross margin expansion (250 basis points in a little over a year -- not bad) than to any improvements in operating efficiency.

Margins %

8/05

11/05

2/06

5/06

8/06

Gross

15.4

14.4

14.9

15.4

17.9

Op.

(1.9)

(1.5)

(1.2)

(1.3)

0.4

Net

12.6

(1.8)

(1.0)

(1.9)

(1.6)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Another reason why this acquisition looks good for Audiovox: The firm could use the revenue boost. Over the last six months, the firm has seen its sales decline 21% year over year. The good news is that cost of goods sold has declined 23% -- resulting in the gross margin expansion noted above. Meanwhile, selling, general, and administrative costs have fallen just 6%, giving back some of the savings gained farther up the income statement.

Operating improvements begin to show themselves not on the income statement, but on the balance sheet, where working capital management appears to be improving. Against the 21% sales decline mentioned above, the firm has reduced accounts receivable 26% and inventories 30%. If investors see more of the same next week, I think they'll be pleased.

Competitors:

  • Sony (NYSE:SNE)
  • Motorola (NYSE:MOT)
  • Matsushita Electric (NYSE:MC)

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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy has some serious bass.