Koss stock would benefit from an equity, convertible debt and/or preferred capital raise
Koss Corp (NASDAQ:KOSS) stock has risen over 6 times this year alone, after rising 123% last year. Koss stock ended last year at $3.44 per share and by the end of Jan. shot up to $64, before falling to $11.90 on Feb. 23. As of Mar. 23, Koss stock had more than doubled again to $24.
Not once during this whole superelevation of Koss did management indicate it would do anything to help its shareholders other than themselves. I pointed this out in my article on Koss last month.
Since then, management has done nothing.
Koss’ Valuation
Right now Koss Corp’s market capitalization is $217 million. Most of the gains in the stock price are due to a failover effect from the GameStop(NYSE:GME) short-squeeze craze. In other words, its gains are not likely to continue after this effect dies down.
Many analysts have written about this effect on Koss stock. For example,this analyst at Seeking Alpha points out the stock is not worth its present price based on its fundamentals.
In fact, the company’s sales growth is likely to slow down this year and next. People are not stuck in their homes under lockdown and listening to as much music. Therefore, they will be buying fewer Koss headphones and other electronic listening gear.
For example, Koss’s trailing 12-month trailing (TTM) revenue was only $18.9 million, as of Dec. 2019, according toSeeking Alpha. Assuming it makes 3% less this year, sales will be just $18.33 million.
That puts its stock market value at 11.9 times sales. But according toMorningstar, its five-year average, including the most current overvalued period, is only 1.16 times sales.
In other words, Koss stock is 10 times overvalued (i.e., 11.9 times sales now vs. 1.16 times, historically).
But if Koss was able to raise a good deal of cash at this level, its valuation would eventually be higher than when the stock eventually drops. This would also be the case if the company was able to expand its product lines or acquire other companies with the extra cash. That would raise its earnings power.
What Koss Corp Could Do
Right now, the company has 7.6 million shares outstanding. Let’s assume they could issue another 7.4 million shares so that there are not 15 million shares outstanding. Let’s say they issue the shares at $25 per share. That would give the company $185 million in cash, plus $4.4 million it has now. That brings us to a total of $189.4 million.
Assuming we value its revenue at twice its historical average, the business would be worth $42.5 million (i.e., 2.32 times $18.33 million). After adding that to the cash value of $189.4 million, the company would be worth $231.9 million. That is greater than its present $217 million market cap.
However, there would twice as many shares, 15 million, now outstanding. Therefore, its target value per share would be $15.46 per share. That is 35% below its present price of $24.
But here’s the thing: The market would likely price the stock at least twice its inherent target value, or $30.92. That would be 28% higher than today’s price.
Moreover, if Koss Corp were to issue the $185 million in cash as convertible debt or convertible preferred stock, the number of shares outstanding would not initially be higher. In addition, the convertible exercise price could be set at a 30% premium to today’s price. That would mean the exercise price would be $33 per share or so.
This would limit the dilution.
Lastly, with this cash, the company could expand its operations, make an acquisition, or even buyback stock, if the shares dropped afterward. All of these would act to enhance the value of the stock.
What To Do With Koss Stock
Many companies buy back their shares in the market when they feel their stock is undervalued. That services to increase the value of the remaining shareholders. This is the same concept. By issuing shares when your stock is overvalued, your company gains advantages and more inherent value than it would otherwise have.
Shareholders should contact management to see if they have any plans in this regard. Until they act to help remaining shareholders, other than selling their own shares in the market, investors should hold off on Koss stock.