Tuning into Koss

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Thursday February 11, 2016

From this angle, negative interest rates are dumb. They effectively force banks to lend money to move the economy or be penalized. This encourages riskier loans with less probability of a payback. Unfortunately, this way of stimulating the economy is becoming more of a flavour of the day and one that the Bank of Canada has said it is not ruling out. It could ultimately have major negative repercussions both on the country and the global economy as it reduces the safety net.

Benj has decided to take refuge, and tune out from what he perceives as inanity with Koss Corp., a stock he purchased at $1.96 (US) last month. One of the major knocks against this corporation that was established in 1953 in Milwaukee is that its products are antiquated. The decline in revenue from $42 million in 2011 to $24 million last year is perhaps an indicator that that is true.

Koss focuses on stereo headphones and began experiencing static around the Great Recession. A decision was made at that point to reduce the longstanding dividend from 13 cents a quarter to 6 cents. The continuation of adverse business conditions forced the elimination of the payout in 2014. As normally happens when dividends are chopped, the stock price swooned.

However, despite adversity, there are many reasons to consider Koss a very attractive buy. Though the company lost money to the tune of $5.5 million in 2014, the bottom line improved to a break-even vibe last year. Prior to that, the corporation made money year after year. While the bank account is almost bare, there is no debt so bankers will not arrive at the door looking for payback. The current ratio (current assets versus current liabilities) is a very healthy 3.46. Insiders own more than 81 percent of the equity and were recently padding their positions. The book value of $2.29 is greater than the current trading price of about $2 without any goodwill to sully the balance sheet.

Koss is not a one-trick pony with a single product. The firm also has a line of accessories including speakers, cases, cables and clothing, which it sells into various parts of the globe. Recent sales have been particularly strong in Asia, Scandinavia and the Czech Republic, while proceeds from Russia and Ukraine slumped. At the end of the day, sales inched up 2.7 percent in the most recent quarter compared with the year before.

Benj’s initial sell target on Koss is $7.24, a level at which it last traded in 2011. A decade ago the stock price was above $30. The feeling from here is that it would not be a surprise to see CEO Michael Koss make a play to take the company private. If a bid does arrive, it will likely be well below the target, but quite a bit higher than the current stock price. Given that there are only 7.38 million shares outstanding, an offer even at a significant premium to the current stock price could land the whole enchilada for less than $25 million. Mr. Koss owns more than two million shares so he would pay considerably less.

Watching governments fumble with ill-conceived flavour-of-the-day policies is disconcerting. While music evolves and some of it is distasteful to our aging ears, one can decide to enjoy the new or switch back to the golden oldies. Such is the consolation that one can shift stations more simply than government practices.