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Bull Of The Day: Turtle Beach (HEAR)

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Turtle Beach (HEAR - Free Report) is a Zacks Rank #1 (Strong Buy) and has posted some remarkable earnings of late.  Let's take a look at the recent results and explore how this stock could reach $40 in the near term in this Bull Of The Day article.

Description

Turtle Beach Corporation is an American sound card and headset manufacturer. In 1995, the company merged with Voyetra, a company that made custom software for sound cards, to form Voyetra Turtle Beach, then headquartered in Valhalla, New York.

Recent Earnings Reports

The last two earnings reports have been absolute monster beats.  Let's look at the May report first and then the August release.

Back on May 10, the company posted earnings of $0.16 when the Zacks Consensus Estimate was calling for a breakeven quarter.  The company also posted a small beat on the topline with $40.9M in revenue compared to the $39.8M Zacks Consensus Estimate.

It should be noted that the stock closed at $6.94 before that earnings report.

The August report was even better.  The company reported EPS of $0.40 when the Zacks Consensus Estimate was looking for a loss of 5 cents.  Revenues were $60.8M, well above the $47.9M Zacks Consensus Estimate.

The company went on to guide revenues higher for the remainder of the year.

The stock closed $30.35 before the August report.

Analysts Moves

Before I get to the analyst move let's just think about the move between reports.  The stock moved from $7 to $30 and my math tells me that is a big move.  What is more, the second report was even better than the first!

Lake Street upped their target price on HEAR to $40 from $15.

Oppenheimer inched their number up to $35 from $31.

I don't have access to the DA Davidson report, but they started coverage on the stock on July 10 with a buy.

Valuation And Estimates

So how do we get a $40 potential price for HEAR?  Well, as a guy that looks mostly at fundamentals, I see the  Zacks Consensus Estimate for 2018 at $2.17 and the 2019 number at $1.99.  Right now the 2019 numbers carry little visibility, but we have seen a recent history of strong demand and excellent execution.

A 20x multiple of next years earnings gets me right to about $40... and that is very reasonable considering the company just posted 218% year over year revenue growth and a 48% sequential lift as well.

At the moment, I see HEAR trading at 11x forward estimates and 30x trailing.  This is well below the market multiple and represents value for a growing company.

This brings me to the question of why isn't this stock in the mid 30's or even testing $40 now?

After the recent earnings release, the company updated a shelf offering of $100M.  They noted on the earnings call that they do not plan on utilizing the offer just yet, but dilution concerns are significant as there only ~14M shares outstanding.

If the company would only raise $10M or $15M from the shelf, then the concerns of a massive dilutive event would ease and allow buyers to step in with confidence.  At this valuation, shares of HEAR are still very attractive.

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