Skullcandy shares are gaining after Bloomberg said in a report that the sharp decline in the stock in the past 18 months has made the company an attractive takeover target. SKUL shares have fallen sharply since the company completed its IPO in July 2011. The stock has fallen nearly 64% since its IPO amid concerns over increasing competition and the company's strategy to focus on lower-margin designs.
According to Bloomberg, Skullcandy has performed worse than all but seven of 185 IPOs completed in the U.S. since July 2011.
Last week, the stock fell to a low of $6.70 after a rating downgrade from Jefferies. The brokerage firm downgraded SKULL from a Buy to an Underperform rating. In a research note to clients, Jefferies analyst Randal Konik said that he has become increasingly concerned about promotional pressures and rising competition in the headphone market and that the in-ear segment, which comprises over 60% of Skullcandy's total revenue is under substantial pressure from several competitors.
However, Bloomberg believes that the company's extremely low valuation makes it a takeover target. According to data compiled by Bloomberg, SKUL's enterprise value of 3.9 times earnings before interest, taxes, depreciation and amortization (EBITDA) is below 96% of the stocks in the Russell 2000 Index.
Speaking to Bloomberg, David King, analyst at Roth Capital Partners LLC, said that he doesn't get the sense that management is wanting or would look to sell at these levels, but you cannot ignore that as being a possible outcome when the stock is trading where it is and the value being as cheap as it is. King believes that despite the pressure on SKUL's business, shares have fallen too far and that could spur a deal.
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by Jason Bond
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