E Turtle Beach With A Turnaround In 2020?

This article is about Turtle Beach Corporation (HEAR) and why I think this stock could be a good BUY. 

I will start with my style on how to analyze a stock. I search for companies in my scope of knowledge. In the best case, I use or have used their services or products. This is true for turtle beach, a few friends and I bought their headphones, they offer good quality for a low price.

After I identified an interesting and familiar company, I contemplate different multiples. By doing this, I identify which companies might be undervalued and are worth further analysis and intrinsic valuation. Subsequently, I search for catalysts that are not priced in by analysts or the market. Moreover, a close look at earnings and revenue estimates is an essential part of my analysis, to identify too low expectations or potential for upside surprises. Eventually, I look at the last quarterly result of the company. If I am still interested in the company and I consider the risk-reward-ratio to be good, I discount future cash flows to determine the fair value. 

2019 Q4 Earnings Report

“Based on preliminary unaudited information, Turtle Beach expects to report fourth-quarter 2019 sales between $100 million and $102 million compared to $111.3 million reported in the fourth quarter of 2018. For the full year 2019, sales are expected to be between $233 million and $235 million compared to $287.4 million in 2018.

“Preliminary diluted earnings per share for the fourth quarter are expected to be between $0.64 and $0.75 compared to $1.33 in the fourth quarter of 2018. For the full year 2019, preliminary diluted earnings per share are expected to be between $0.40 and $0.50 compared to $2.74 in 2018. Preliminary adjusted diluted earnings per share for the fourth quarter are expected to be between $0.67 and $0.78 compared to $1.33 in the fourth quarter of 20182. For the full year 2019, preliminary adjusted diluted earnings per share are expected to be between $0.57 and $0.69 compared to $3.05 in 2018.” Source: Seeking Alpha PR Newswire

Revenues are expected to decline by 8% to 10% YoY in Q4 of 2019 and by approximately 18% for the full year of 2019. The stock dropped by more than 10% following the preliminary report. This report decreased future expectations as I will layout later in this analysis. The actual earnings report for Q4 2019 is expected to be on the 12th of March, Turtle Beach will deliver the precise Revenue, Earnings and guidance for 2020. I am especially looking forward to the guidance, I expect it to beat estimations by analysts and the stock to move up accordingly.

Multiples

All of Turtle Beach's are fairly low compared with the industry average. Turtle Beach has a trailing PE of 4.1, a price to book ratio of 2.2 and a price to sales ratio of 0.38. The reason for these multiples is worsening fundamentals. The market tends to overreact, to the downside as well as to the upside. Is this also the case for turtle beach? (HEAR) is down nearly 80% from its high in 2018. Due to the release of Fortnite, the demand for headsets skyrocketed and revenue & earnings surprised to the upside. Since then numbers have normalized again. I was asking myself is: was this strong downward move justified? 

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Disclosure: I am long HEAR.

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Comments

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Barry Glassman 2 months ago Member's comment

I think gaming companies are going to go way up as more and more cities are quarantined due to #covid19. What else will people do besides play video games all day! That's exactly what happened in China.

Robert Templin 2 months ago Author's comment

A good friend of mine had the same thought, although I think it might have an influence, I expect it to be a minor one and more of a short-term nature.

Barry Glassman 2 months ago Member's comment

Depends on how long this whole thing lasts or how far reaching the quarantines are. In China, where millions of people have been quarantined for months, from what I read, the impact has been significant.

Adam Reynolds 2 months ago Member's comment

Great read. I remember the Warcraft series fondly!

Robert Templin 2 months ago Author's comment

Thank you. I appreciate it a lot!