Why the Kahn Brothers own Voxx International

Why the Kahn Brothers own Voxx International

Published on:
January 5, 2019
Reading time: 3 Minutes.
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

***April 29, 2020 summary: I bought 2,000 shares on December 18, 2018 for a total of $9,099 or $4.55 per share. Less than a year after, on November 29, 2019, I sold all shares at $4.64 a share. I didn't understand Voxx business and didn't have any interest in learning more about it***

It is one thing to watch a live soccer game, and it is quite the other when we know already which team had won the match. In the former, we try to make sense of what we don't know, and in the latter, we make sense of what we already know.

So it is in stock investing. When you know that General Electric (GE on Nyse) was $15 and now trades at $7 - it is simple to see the decline in price. GE had a shakeup in management; the spot price of energy dropped, and the prospects of solar energy are not as alluring as they were when Al Gore ran for president [1]. 

But determining whether in a year's time GE's stock will again halve in price is a different task. I once heard that as opposed to Physics - where three formulas explain 99% of the observed phenomena - in stock investing, 99 formulas explain less than 3% of what eventually happens. 

There are too many unknowable and unforeseeable variables that will cause a stock price to move up or down. And to predict price movement is to predict the future. Rarely a success.


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Voxx largest shareholders 

This week I came across Voxx International, a small-capitalization stock of $108 million that is controlled by its founder, the 86-year old Mr. John Shalam. 

Voxx sells audio accessories across the globe and holds an umbrella of 30 brands that it has acquired over the past decade. The company earned about one dollar per share in 2017 and is expected to earn roughly the same in 2018. It is trading at about five times the 2017-2018 average earnings per share.

More intriguing about Voxx are its owners. I mentioned already that Shalam owns the majority of the outstanding shares, and had rarely sold shares over the past 15 years (less than 1% in dilution, compounded annually). 

Voxx International Largest Shareholders
Voxx Largest Shareholders. Resource: Proxy 2018 filing.

More of interest is that Kahn Brothers Group (KBG), the flagship investment arm of the legendary value investor Irving Kahn, of blessed memory, not only holds about 15% of the outstanding common stock but has also been a shareholder in Voxx International for 15 years.

Why the long hold period, I wonder. Nothing appears to be unique about Voxx International. The operating margins are slim, and the business model has not been consistent either. 

Fifteen years ago, the strategy was to leverage the brand Audiovox Corporation. But the business model completely changed over the past decade as management realized that capital markets preferred that management grew earnings via mergers and acquisitions. And the company had enough years of operating losses that Benjamin Graham would warrant its stock to be a speculative position.

Why Kahn Brothers Group has owned the stock for 15 years

Initially, I estimated that this was a classic loss aversion case. Based on the 13-F filings, the average cost per share for KBG was $9, and since the paper loss is now about 50%, KBG is merely waiting until the stock climbs to a reasonable price.

Or perhaps KBG cannot quickly sell the shares in Voxx. If a company owns over 5% of the outstanding shares in a publicly-traded firm, the company must publicly disclose its intention to sell shares.

Finally, I concluded that KBG must understand something that I do not. Perhaps Mr. Market is unhappy with the controlling member or maybe the value of the business, as an umbrella that holds many brands is worth much more than the price of the brands individually. Perhaps KBG believes the intrinsic value is much higher than what the basic discounted cash flow approach reveals.

Is Voxx International a Bargain Stock? 

While on the surface, Voxx appears to be a bargain at a price to earnings ratio of five times, at a closer look, management reported that only 3 cents of the reported earnings of $1.41 are from continuing operations. 

Last year's earnings were primarily the result of the selling of Hirschmann Car Communication. The sale of Hirschmann is an example of why the Kahn Brother Group continues to hold the stock is my final guess.

Voxx, in numbers

At its most recent annual filing, the company reported assets of $575 million with associated liabilities of $125 million. The equity is $450 million or $20 book value per share, resulting in a price to book value per share of 22%. 

Voxx 2018 to 2014 operating results. Resource: Public filings.

Removing goodwill and intangible assets of $250 million, which are 43% of the reported assets, the equity balance is $200 million or $9 per share, a price to book value of 49%.

So I went ahead and bought a few shares in Voxx. While I understand little about the consumer sector (I did not recognize a single brand owned by Voxx), I am hoping for two things. 

First, that KBG knows something about the business that I have yet to discover, and second, that, indeed, the value of the assets is worth more than what Mr. Market is now willing to pay for them at the moment.

FOOTNOTES: [1] GE traded at $45 a share at the time.
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