An Apple a Day Keeps These Companies Alive

Headphone maker Skullcandy (NAS: SKUL) and case distributor ZAGG (NAS: ZAGG) are just two of the companies trying to capitalize on Apple's (NAS: AAPL) popularity. The two sell accessories for iDevices, as well as other manufacturers' products, and both have seen increased sales over the past year. However, only one of these tagalongs has what it takes to succeed.

The apple of my ear
Not everyone loves Skullcandy, and that's a great reason to get interested. There's no better feeling than getting in before investors catch on to a company. The stock currently has 32% of its shares shorted, but the underlying business is thriving.

With more and more people ditching Apple's earache-inducing buds, Skullcandy has carved out a niche by providing alternative fashionable headphones. Customers have responded positively, and Skullcandy's sales grew 45% last year. The company is managed by a diverse team that includes alums from RVCA, BitTorrent, and Panasonic. It has the retail, technology, and fashion backgrounds needed to continue defining the designer headphones niche.

Skullcandy has also made some great marketing moves recently. In the tradition of other successful, youth-focused brands, it's built relationships with a wide range of sports celebrities, including NBA star Kevin Durant, motocross rider Jeremy McGrath, and supermodel Kate Upton.

On the financial side, it grew its gross margin five points to 50%, showing an increase in efficiency. It also managed down accounts receivable to 30% of its assets, due to a stronger position with retailers. With 2012 set be another great year for Apple, Skullcandy has set itself up to ride the wave all year long.

They should have zigged
iPod accessory producer ZAGG is in a boat that looks a lot like Skullcandy's, but ZAGG's boat is full of holes. The company also supports the iWorld, producing skins, cases, and those plastic covers that stop you from smearing jam all over the screen. ZAGG is also disliked by Wall Street, with 32% of its shares shorted.

The products it makes are incredibly useful, so it's no wonder competition is fierce. While Skullcandy also faces competition, the company has managed to carve out a niche in the designer headphone space. Consumers pay a higher price for the look as well as the function. On the other hand, ZAGG's products can sell for more than three times comparable items, and do not enjoy any competitive advantage.

On top of all that, the company is running its finances into the ground. Last year it spent close to $50 million in cash to acquire iFrogz as part of a $105 million deal. iFrogz produces products similar to ZAGG's, so the purchase made sense from a competitive standpoint. Unfortunately, it was ill timed. ZAGG had to take out a $45 million loan and open another $45 million in credit to complete the deal. If the company keeps on spending like that, the ZAGG dinghy is going to slip under the waves.

Snagging a slice of the pie
As Apple continues to grow and release new products, more and more companies are going to try and get in on the action. As investors, we should also be looking to take advantage of good opportunities. Even though neither of these companies is feeling the Wall Street love, Skullcandy is poised to make something of itself. With a strong brand, good marketing, and a popular product, it's got a great outlook. ZAGG, on the other hand, is fighting to stay alive -- and it looks like a losing battle.

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Editor's note: A previous version of this article incorrectly stated the shares short of these companies. The Fool regrets the error.

At the time thisarticle was published Fool contributor Andrew Marder has no stake in any of the stocks mentioned in this article. The Motley Fool owns shares of Skullcandy. Motley Fool newsletter services have recommended writing naked calls on ZAGG. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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