Stock Trak Idea: July 15, 2008by TMFRedwoodLOJACK CORPORATION (Nasdaq: LOJN) $5.65Market Cap $100 M Book Value $122 M Enterprise Value $70 M 2007 Revenue $223 M Net Income $21 M FCF $30 M 2008E Revenue $180 M Net Income $4 M (Guidance is still $13 M)Dividend yield n/a Value: $6-9SummaryLoJack shares have suffered from heavy auto industry cyclicality, but getting dropped from the Russell 2000 index on June 30, and the CFO’s resignation on June 28 have combined to give us a 40% discount in two weeks on this solid franchise. LoJack is a tracking device for stolen cars that is able to find a vehicle 9 times out of 10. It is hidden in a car and switches on when it is reported stolen. It emits a radio frequency signal that is received by police cruisers that have LoJack systems already installed. Its technology is different than OnStar because it can “see” through buildings and uses law enforcement to find the vehicle. LOJN has expanded its technology to motorcycles and construction equipment, and has licensed its brand for laptops. Why Buy Now? • Incredibly cheap based on normalized earnings. These earnings WILL reappear. • Domestic woes overlook strong international business – 24% of sales but over half of profits. • Good cash-generating business with a real competitive advantage and ways to leverage the brand. • Shareholder-friendly management has been buying back stock. • $30 million of excess cash should see it through the downturn. Risks• As the auto industry goes, so goes the company. LoJack is a somewhat discretionary product. • Stepping in front of a negative trend can have painful consequences. The trend hasn’t turned yet: Y/Y declines in car sales in June were about equal to those in March (down 18%).• Canada business will be weak due to conversion of cellular networks from analog to digital • Reinvestment options in the domestic business are somewhat limited. I value the company conservatively at $6-9 per share. This is based on $12-16 million of earnings in 2013 at a 15x multiple, discounted back at 11%. To get there I assume sales fall 5-9% in 2009 (in addition to minus 20% this year) and then grow at 7-9% for four years. I also assume lower net margins than historical averages. I didn’t even bother with a best case scenario, but the value would be much higher in that case. LoJack is trading for less than it is worth due to the worst conditions in the automotive market since 1980. The cash generating potential of the business is being ignored. This type of price is only available when the outlook is negative or unclear, and when it clears up this low price will no longer be available. LoJack is a golden opportunity to look like a hero in 4 years, a complete idiot in 4 months, or both. Hence, I opened up a 1% position at $5.68.
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