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Author: PhoolishPhilip Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 441  
Subject: Boston Acoustics (BOSA) Date: 5/20/2001 11:04 PM
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I thought I would kick off a "presentation" with a small company that appeared on a value screen of mine, the multi-media speaker manufacturer called Boston Acoustics.

Business Discription

Boston Acoustics, Inc. engineers, manufactures and markets loudspeaker systems for use in home audio and video entertainment, and in after-market automotive audio systems.

Recent Results

Sales have been declining recently, falling from $118 million in FY 1999 to $110 million in FY 2000. Sales have continued to fall in the most recent quarters, with the company predicting a net quarterly loss in the next quarter. The company recently took a hit with an inventory write down. The company attributed the downturn to a slowdown "in sales in its two business segments: home and car entertainment products and multimedia speakers for personal computers."


Year Revs EPS Owners Earnings ROE Net Margin
2000 108 $1.25 $5.2 mil 18.7% 6.1%
1999 118 $2.14 $9.6 mil 39.1% 9.6%
1998 82.4 $1.74 $9.8 ml 30.6% 11.7%
1997 50.3 $0.82 $5.7 mil 14.0% 10.9%
1996 46.3 $1.01 - $1.3 mil 16.5% 14.3%

DCF Analysis

Discounted Cash Flow Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Prior Year Owners Earnings 5.2 5.5 5.7 6.0 6.3 6.6 7.0 7.3 7.7 8.1
Growth Rate of Owners Earnings 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Owners Earnings 5.5 5.7 6.0 6.3 6.6 7.0 7.3 7.7 8.1 8.5
Discount Factor (12%) 0.89 0.80 0.71 0.64 0.57 0.51 0.45 0.40 0.36 0.32
Discounted Value Per Annum 4.9 4.6 4.3 4.0 3.8 3.5 3.3 3.1 2.9 2.7
Sum of PV of Owners Earnings 37.1
Residual Value
owners earnings in year 10 8.5
terminal growth rate (g) 5%
owners earnings in year 11 8.89
capitalization rate (k-g) 7%
value at the end of year 10 127.05
discount factor at end of year 10 0.32
Present Value Residual 40.91 $8.34 per share
Intrinsic Value of the Company 78.00 $15.91 per share
Present Market Capitalization 54.52
Discount to Intrinsic Value 30%
Share Price $11.12
Earnings Per Share $1.25
Shares Outstanding (millions) 4.9
Avg. PE last 10 years 13.6
High PE last 5 years 25.0
Low PE last 5 years 7.4

Valuation Estimates

Share Price $11.12 Earnings Yield = 11.2%
Intrinsic Value $15.91 Dividend Yield = 3.1%
EPS * Avg. PE $16.98
Bond Price $20.83 Margin of Safety 0.783989446
Low PE Price $9.25
Graham Price $13.57
ACGR of Share Price (5 yrs.) 3.9%
ACGR of Dividends (5 yrs.) 0.6%
ACGR of EPS (7 yrs.) 8.0%
PE Ratio 8.90

Boston Acoustic seems to have been hurt by the downturn in the PC market. Despite the recent troubles, it may present an opportunity given the limited downside risk. Assuming a 5% growth rate and a 15% discount rate, I get an intrinsic value of nearly $16 a share. At the current price of $11 I believe that BOSA is trading at a 30% discount to its intrinsic value. It is also trading at a ten year low PE ratio of 9. Furthermore, BOSA is currently selling at 1.37 times book value, a level that hasn't been reached in the ten years of data I have examined. While times are certainly tough for BOSA, I don't think they are THAT tough. The company is unlikely to go bankrupt anytime soon, with EBIT covering interest payments over 14 times. The company also has a good history of putting its cash to work for shareholders, with shares outstanding shrinking from 6.5 million in 1996 to 4.9 million in 2000. If the price were to recover to its ten year average price to book ratio of 2.65 it would be worth nearly $20. A return to the ten year average PE ratio of 13.5 would put the price at $17.


It seems to me that BOSA might be worth a closer look by any serious value investor. While it looked better under $10, it still loks like there is a lot more upside than downside at $11.

Feedback appreciated.

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