Logitech International SA

Transcription

1 March 18, 2015 Logitech International SA Current Recommendation Prior Recommendation Outperform Date of Last Change 03/18/2015 Current Price (03/17/15) $12.50 Target Price $13.00 NEUTRAl (LOGI-NASDAQ) SUMMARY Logitech again reported strong quarterly results, with third-quarter fiscal 2015 earnings soaring past the Zacks Consensus Estimate and year-ago quarter figure. Strong performances for PC Gaming and Mobile Speakers again remained the growth drivers. Encouraged by another quarter of strong results, the company raised its fiscal 2015 operating income guidance for the second time. It remains focused on driving growth by offering new and innovative products and cost-streamlining initiatives. In addition, Logitech recently disclosed a three-year capital allocation plan. However, rising operating expenses and stiff competition remain matters of concern. Also, currency fluctuation risks remain an overhang. SUMMARY DATA 52-Week High $ Week Low $11.51 One-Year Return (%) Beta 1.14 Average Daily Volume (sh) 280,753 Shares Outstanding (mil) 164 Market Capitalization ($mil) $2,050 Short Interest Ratio (days) Institutional Ownership (%) 32 Insider Ownership (%) 8 Annual Cash Dividend $0.17 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) -1.2 Earnings Per Share (%) -3.5 Dividend (%) N/A using TTM EPS 12.9 using 2015 Estimate 13.7 using 2016 Estimate 19.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Mid-Blend Industry Comp-Periph Eqp Zacks Industry Rank * 114 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) A 548 A 615 A 469 A 2,101 A A 532 A 628 A 485 A 2,123 A A 530 A 634 A 468 E 2,116 E E 525 E 639 E 486 E 2,124 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) $0.11 A $0.14 A $0.10 A -$0.09 A $0.04 A 2014 $0.02 A $0.17 A $0.32 A $0.10 A $0.61 A 2015 $0.19 A $0.28 A $0.40 A $0.04 E $0.91 E 2016 $0.09 E $0.13 E $0.37 E $0.04 E $0.63 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Founded in 1981 in Switzerland, Logitech International S.A. is the parent holding company of Logitech, a Swiss holding company. Logitech International S.A. is a global leader in peripherals for personal computers and other digital platforms, which develops and markets innovative products in PC navigation, Internet communications, digital music, home-entertainment control, video security, interactive gaming and wireless devices. The company conducts its business through subsidiaries located throughout the world. The company primarily operates through two business segments: peripherals and video conferencing. Peripherals: The peripherals segment consists of the design, manufacturing and marketing of peripherals for PCs (personal computers) and other digital platforms. For the PC, the company s products include mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams, 3D control devices and lapdesks. Tablet & Other Accessories products include keyboard and covers. Internet communications products comprise webcams, headsets, video communications services and digital video security systems for a home or small business. Mobile Speakers products include wireless speakers, earphones and custom in-ear monitors. For home entertainment systems, Logitech offers the Harmony line of advanced remote controls and Squeezebox wireless music solutions. Video conferencing: This segment includes the design, manufacturing and marketing of LifeSize video conferencing products, infrastructure and services for the enterprise, public sector and other business markets. LifeSize products include expandable HD (high-definition) video communication endpoints, HD video conferencing systems with integrated monitors, video bridges and other infrastructure software and hardware to support large scale video deployments, and services to support these products. REASONS TO BUY Growing adoption of new mobile platforms, such as tablets and smartphones in both mature and emerging markets are fueling the demand for Logitech s peripherals and accessories. The rising demand has led to strong retail sales growth for the company. In particular, Logitech s mobile speaker business has been going strong for the past one year, driven by strength in the UE BOOM. Prompted by this success, earlier in January, the company announced UE MEGABOOM a sequel to UE BOOM. Further to enhance the user experience, Logitech introduced a new feature which will facilitate its existing and new users to connect over 10 of its UE BOOM and UE MEGABOOM speakers at the same time. Moreover, the company s video collaboration and PC gaming offerings are gaining strong momentum. Rising sales of Logitech s product line bodes well for the future. Logitech is intending to tap the high potential market for accessories by pursuing innovation and expanding its product lines. The company has manufactured innovative offerings like fastest performing mouse and keyboard switches, wireless mouse with longest battery among others. Riding high on product innovations, in recent times, Logitech launched a portable videoconferencing solution and Logitech G series gaming mouse. Going forward, the company is aiming at broadening its in-store presence in key regions, to cater to the trending demand across the globe. This promises strong growth prospects and will pave the way for strengthening its top line. Logitech is dedicatedly following its three-year turnaround plan, implemented earlier, to reduce its costs while driving up profits and margins significantly. As per the plan, Logitech has been working on its core business structure including its designing, manufacturing and distribution system to improve the operational efficiency significantly. Also, the company has been divesting non-profit assets to reduce Equity Research LOGI Page 2

3 costs. Logitech has also been dedicated to cutting down on non-gaap operating expenses for the last few quarters. Most importantly, Logitech expects to focus on making selective investments to ensure disciplined cost management in quarters ahead. Such cost-cutting and restructuring initiatives are expected to significantly benefit the company, going forward. Logitech s strong cash and balance sheet position allow it to pursue strategic mergers and acquisitions for further expansion of its business. As of Dec 31, 2014 Logitech s cash and cash equivalents of $516.6 million increased from $379.9 million at the end of Dec 31, Apart from this, the company has made efforts to increase returns to its investors through share repurchases and dividend hikes. Most recently, Logitech disclosed a three-year capital allocation plan through which it expects to return up to $500 million in cash to its stockholders via dividends and share repurchases. Moreover, the company is planning to propose for a Swiss franc equivalent of an $85 million dividend for Logitech aims on continuously raising dividends and paying higher returns, to win investors loyalty. We believe such initiatives boost shareholders confidence in the stock. REASONS TO SELL The rising trend of smaller, mobile computing devices with touch interfaces and the declining popularity of desktop PCs have rapidly changed the market and usage models for PC peripherals and webcams. Declining demand in the company s most profit-maximizing products like desktops and diverse porting tools can be a headwind for the company. Moreover, the company s sales are impacted by end-user consumer demand and therefore, the business can be negatively impacted by unanticipated shifts in consumer buying patterns. The market where Logitech operates is highly competitive and characterized by short product life cycles, constant new product introductions, rapidly changing technology, evolving customer demands and aggressive promotional and pricing practices. Therefore, in a dynamic market as this, Logitech needs to bring in newer products matching the trend in order to survive the competition which will be a crucial factor in driving the company s revenue growth, moving forward. Although such innovations fuel Logitech s growth momentum in long term, they tend to increase the company s operating expenses. This remains a matter of concern for Logitech. Logitech s business is prone to be affected by the negative impact of currency translation as the company derives highest portion of its revenues from outside Americas. In third quarter fiscal 2015, international businesses contributed about 55.7% of the company s total net sales. Hence, fluctuations in currency exchange rates, weaknesses in political and macroeconomic conditions of Logitech s operating markets may hurt its quarterly results and thus remains a matter of concern. RECENT NEWS Logitech Woos Investors via Dividend Plan, Guides for 2016 Mar 11, 2015 Prior to a debriefing with financial analysts and investors today, Logitech surprised investors with a great news. This involved a long-term capital allocation plan via dividend and share buybacks. Along with this, the company disclosed the reiteration of its 2015 guidance and provided its 2016 outlook. Equity Research LOGI Page 3

4 Investors Delight Logitech stated its intention of returning up to $500 million in cash to its stockholders in a span of three years. This comprises a $250 million dividend payout plan, which will complement the company s existing $250 million share repurchase program for the specified time frame. Further, at its next annual general meeting, Logitech is planning to propose for a Swiss franc equivalent of an $85 million dividend for the year 2015, to its board of directors. Notably, as per Logitech s current conversion rate and shares outstanding count, this signifies around CHF 0.52 per share double compared to 2014 dividend rate of CHF 0.26 per share. Guidance in Focus Talking about the guidance, Logitech continues to expect its 2015 sales to be around $2.11 billion and non-gaap operating income to be approximately $185 million. On the other hand, Logitech anticipates its 2016 sales to be about $2.15 billion and non-gaap operating income to be around $150 million. Going forward, Logitech expects its sales to be benefited by improving operations. However, the company projects the strengthening U.S dollar to significantly affect its financials. Nevertheless, Logitech is working towards neutralizing the impact of the appreciating U.S. dollar through pricing adjustments and global cost structure reductions. Logitech Woos Gamers with G-Series Mouse Launch Mar 5, 2015 Logitech recently introduced a new Logitech G series product Logitech G303 Daedalus Apex Performance Edition Gaming Mouse. The company s latest innovation signifies Logitech s dedication towards producing a technologically advanced device for boosting users gaming experience. The company declared the availability of Logitech G303 Daedalus Apex Performance Edition Gaming Mouse in the U.S. and Europe, from this month at a retail price of $ Logitech has designed the product based on feedback from gaming enthusiasts and the esports community. The Logitech G303 boasts the Logitech G exclusive Delta Zero optical sensor technology one of the highly advanced optical sensors in the gaming universe for maximum tracking accuracy. In addition, the device has full-color RGB lighting that can be personalized from a palette of about 16.8 million colors, for enhanced visual experience. Apart from these, the gaming mouse s lightweight, compact and durable design adds to its accuracy and performance level. Logitech Launches Advanced Videoconferencing Device Jan 26, 2015 Logitech launched a portable videoconferencing solution Logitech ConferenceCam Connect to enhance the experience of mobile audio and video collaboration for small groups in a workplace. This breakthrough device, which is said to bring transformation in communication field, works with any computing device having an USB connection and any videoconferencing software. The ConferenceCam Connect provides a highly sharp resolution, 4x digital Full HD zoom, a 90-degree field of view, ZEISS optics with autofocus and a mechanical tilt control. Moreover, the speaker has both USB audio and mobile calling facility and has features like Bluetooth wireless technology, near field communication and a USB port. Equity Research LOGI Page 4

5 Logitech Beats Q3 Earnings Again, Guides Higher Profit Jan 21, 2015 Logitech declared third-quarter fiscal 2015 non-gaap earnings of $0.41 per share, surpassing the Zacks Consensus Estimate of $0.30 by 36.7% and the year-ago quarter figure of $0.35 by 17.1%. The strong quarterly results are attributable to improved performance across all its segments, primarily led by PC Gaming and Mobile Speakers. Also, Logitech experienced a significant increase in its operating income. Prompted by another quarter of strong results, the company raised its fiscal 2015 operating income guidance for the second time. Behind the Headlines Net sales increased 0.9% year over year to $634.2 million and exceeded the Zacks Consensus Estimate of $631 million. Based on channels, Logitech s Retail sales increased 1.7% year over year to $574.0 million. On the other hand, OEM sales declined 12.3% year over year to $30.3 million and Video Conferencing sales slipped 0.2% to $29.9 million. On the basis of Retail category Product Division, PC Gaming posted a 20.7% year-over-year increase in revenues, while Tablet & Other Accessories revenues were weak, reflecting a 28.4% year-over-year decline. Nevertheless, Mobile Speakers demonstrated remarkable growth with a robust 82.1% increase in revenues over the prior-year quarter. Adjusted gross margin improved to 36.6% compared with 34.5% a year ago. Conversely, adjusted operating expenses rose 3.8% year over year to $156.0 million. Consequently, adjusted operating income increased 14.3% year over year to $76.4 million. Liquidity As of Dec 31, 2014, Logitech s cash and cash equivalents stood at $516.6 million, as compared to $379.9 million as of Dec 31, Also, the company s operating cash flow stood at $232 million as of Dec 31, 2014 year-over-year basis. an 86% rise on a Guidance For fiscal 2015, Logitech raised its adjusted operating income guidance to approximately $185 million from around $170 million. However, the company lowered its sales outlook for fiscal 2015 to about $2.11 billion from $2.16 billion guided earlier. The revised guidance reflects the negative effect of the strengthening U.S. dollar. VALUATION Logitech s current trailing 12-month earnings multiple is 12.9X, compared to the 28.2X average for the peer group and 18.2X for the S&P 500. Over the last 5 years, shares have traded in a range of 13.7X to 174.2X trailing 12-month earnings. We changed our long-term recommendation on the stock to Neutral as we expect it to perform in line with the broader market. Our target price is $13.00 or 14.3x 2015 EPS, which is within the historical range. Equity Research LOGI Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Logitech International SA (LOGI) N/A Industry Average S&P LG Display Co., Ltd. (LPL) NUKO INFORMATION SYS (NUKO) N/A N/A N/A N/A N/A N/A N/A Synaptics Inc. (SYNA) Electronics for Imaging, Inc. (EFII) 47.4 N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Logitech International SA (LOGI) Industry Average S&P Equity Research LOGI Page 6

7 Earnings Surprise and Estimate Revision History Equity Research LOGI Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of LOGI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform %, Neutral %, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research LOGI Page 8