Invest in ZAGG - Up and coming company

Company Overview
ZAGG was founded in 2005 and began its operations with one core product: the Invisible Shield. The invisible shield is essentially a screen protector for electronic devices. However, what sets the product apart from everything else in the market is its quality. The company’s founder created the product out of material that is essentially used for military purposes to protect the blades of helicopters. He took this high quality material and created a consumer product. The material completely protects your device from scratches. To look at a video of the product in action, visit www.zagg.com and take a look at any of their videos. We feel that the company is poised for explosive growth as the use of smartphones and devices such as the iPad has become so prevalent. Instead of betting on an individual device maker, why not bet on the growth of the entire industry? The company’s bestselling products are the shield for the iPhone and more recently, the shields for the iPad. Over the years, the company has expanded into other areas such as audio devices, leather cases, and other electronic accessories. The company has no debt and a growth rate of over 100%. With the growth of smartphones (they make shields for essentially every new cell phone on the market), the company should see a boost in sales. Any short-term catalysts such as the Iphone’s introduction to Verizon will have a direct impact on ZAGG. ZAGG sells its products in Best Buy, mall kiosks, and more recently, in Verizon and AT &T stores.

In the last 12, months, ZAGG, reported an EPS of .33. Since the company is extremely young, its cash flows are uncertain. Their most recent quarter’s earnings significantly beat analyst estimates and represented an earnings growth of 300% over the same quarter last year. Although I believe it is extremely difficult to come up with a growth rate for ZAGG, I believe the uncertainty is only to the positive side and it is possible to perform a DCF valuation being conservative. Since ZAGG’s products are mainly related to the mobile device industry, a growth rate of the smartphone market would be a reasonable measure. The smartphone market has grown an average of 30% over the past 4 years and the trend is expected to continue. In fact, just over the past year, the market grew 55.4%. It is safe to assume that ZAGG’s earnings will grow at the same rate as the smartphone market at a conservative rate of 25%. Taking account for ZAGG’s business maturing over the next 5 years, a growth rate of 20% is more likely.
Based on a DCF valuation, ZAGG has an intrinsic value of $14.65, which is significantly higher than its current price around $8 a share. Keep in mind that the earnings growth could be much more explosive since the company is very new and is also expanding into markets such as accessories for laptops and devices such as the iPad.
EPS for past 12 months : $.33
PV of earnings based on a 20% growth rate and a discount rate of 8.55% based on a risk free rate of 3%, market premium of 5%, and a beta of 1.11:
Year Earnings PV
1 .40 .37
2 .48 .41
3 .57 .45
4 .68 .49
5 .82 .54
Terminal value 12.40

Terminal value is based on a constant growth rate of 4% (based on average US growth). The discount rate was based purely on CAPM since the company does not have any debt.
Since the DCF valuation for a company such as ZAGG could prove not to be very reliable, I feel that the best measure to value a company such as ZAGG is with the PEG ratio. The Price to earnings to growth ratio takes earnings growth into account. ZAGG has a Forward PEG ratio of .7. This compares to a 1.6 ratio for the entire S&P 500, which is a 54% discount relative to the S&P. It has a Forward P/E ratio of 20.6, which is a 16% premium to the S&P 500 ‘s Forward P/E ratio of 17.7. Although ZAGG is trading at a premium, I think a premium of 16% is warranted for a high growth company.