20-40% UP
Logitech: Too Cheap To Ignore
Jan. 01, 2022 8:21 AM ETLogitech International S.A. (LOGI)3 Likes
[Blockierte Grafik: https://static1.seekingalpha.com/images/users_profile/049/499/653/small_pic.png]Justin J. Lee
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Summary
- Logitech's business grew rapidly during the pandemic as people outfitted their home office and bought more gaming accessories.
- Their high quality and brand power create an economic moat, and that results in high profitability.
- The market expects the growth rate to drop as the Pandemic draws to an end, and people will quit spending on computer peripherals.
- Due to this uncertainty, Logitech is priced at a bargain.
- I expect 20-40% upside from the current level.
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Chainarong Prasertthai/iStock via Getty Images
Investment Thesis
Logitech (NASDAQ:LOGI) is a world leader in designing, manufacturing, and selling the computer and entertainment peripherals. Their mouse, keyboard, webcams, and other gaming peripherals are in market leading position and command a premium from customers. During the pandemic their revenue grew rapidly as people renovated their home offices and purchased more gaming peripherals. As people start returning to work, the market is expecting Logitech's growth rate to slow down. I believe the market is overestimating the slowdown and Logitech is a bargain at this point. Logitech provides a great investment opportunity for a value investor because:
- The revenue growth rate may slow down, but their regular (pre-pandemic) year growth rate (9-10% per year) is still impressive. I believe they will maintain that level for the foreseeable future.
- Their products are considered some of the best on the market and command a premium from customers. Their high profit margins demonstrate their economic moat.
- They have an exceptionally strong balance sheet with negligible debt ($43 M) compared to their pile of cash ($1.14 B).
Revenue growth to continue, but at a more normal level
Logitech posted remarkable growth since the start of the pandemic, as people raced to equip their home workspaces. YoY sales grew 75% in Q2 2020 from peripherals, webcams, audio equipment, and smart home equipment. Although sales pace has slowed substantially, it remained strong through 2021 with 4% YoY growth. This is much more consistent with the about 9% annualized growth of the 5 years prior to the pandemic. The tapering revenue was expected as people finished outfitting their new home workspaces. However, the transition into new norms for work and entertainment is far from complete, and should drive future growth. In fact, the global computer peripherals market is expected to grow by 5.1% CAGR through 2027.
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Source: Seeking Alpha
Several trends will continue to push up the use of peripherals. First, in the near future people will increasingly shift into hybrid workplaces. Many will return to offices on at least a part time basis and these offices will need to be updated to accommodate a fluid workforce. For example, Logitech management points out that there are 90 million meeting rooms worldwide, but only 8% are outfitted with video equipment. Office spaces will need to offer more flexible meeting rooms going forward as it becomes mainstream to have employees distributed across locations. Second, people are increasingly turning to their computers for entertainment. Gaming and digital creation continue to surge. Hours watched across media platforms, such as YouTube, Twitch, etc., have increased 20% YoY for two consecutive years. There are no indications of slowdown even as we leave the pandemic lockdowns behind us. More and more people are both creating and watching content. This will continue to fuel growth in video, gaming, and peripherals going forward.
Market leadership position and high profitability
Logitech is in an excellent position to capitalize on the changing trends and growing market. Logitech is a leader in video conferencing equipment, selling around 50% of all devices. They are also a strong player in the gaming accessories and productivity market. They lead the field in design and technical engineering for productivity keyboard/mouse sets, offering innovative keyboards such as MX Keys Mini and POP keys as their most recent launches. Logitech has recently adopted an innovation-led business model (rather than promotion-led) and has increased R&D spending by 29%. Taken together, Logitech should be able to maintain their market leading positions in the near future.
Profit margins are strong, with EBITDA and net income margins well above peers. Gross margin benefiting from a boost during the extremely strong demand at the beginning of COVID lockdowns, and has since returned to its traditional long-term target range. These profitability metrics reflect Logitech's market position leadership and strong brand reputation, which allow them to charge premium prices for their products. The profitability metrics and gross profit margin trends are shown below.
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Source: Seeking Alpha
[Blockierte Grafik: https://static.seekingalpha.com/uploads/2021/12/31/49499653-16409808231677818.png]
Source: Slide from investor presentation
Exceptional balance sheet and low valuation
Logitech's strong market position and profitability enable them to generate substantial cash. Cash has increased from $478 M to $1.75 B over the past decade. They have near-zero debt. They are constantly searching for acquisition targets and are in a position to act if they find the right one. They also are able to reward shareholders with a 1.12% dividend, which has grown by around 10% over the past 5 years.
Despite strong market position, great profitability, and a robust balance sheet, Logitech is trading at a historically low P/E (19.25) that is well below its pre-pandemic level. Management forecasts net zero growth in 2022, and investors appear to be over-penalizing Logitech for the anticipated slowdown in growth. I believe that Logitech is a strong company with good fundamentals. The historically low P/E makes it an attractive investment right now.
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Data by YCharts
Intrinsic Value
I utilized DCF model to estimate the intrinsic value of Logitech. For the estimation, I utilized the EBITDA ($1,225M) as cash proxy and current WACC of 8.0% as the discount rate. For the base case, I assumed operating cash flow growth of 10% (consensus revenue growth rate from Seeking Alpha) for the next 5 years and zero growth afterwards (zero terminal growth). For the bullish and very bullish case, I assumed operating cash flow growth of 13% and 15%, respectively, for the next 5 years and zero growth afterwards.
The estimation showed that the current stock price represents 20-40% upside from the current level. Given the superior products and economic moat protecting them, I expect they will maintain steady revenue and profit growth, and achieve this upside.
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Price Target
|
Upside
|
Base Case
|
$102.69
|
22%
|
Bullish Case
|
$115.17
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37%
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Very Bullish Case
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$124.20
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48%
|
The assumptions and data used for the price target estimation are summarized below:
- WACC: 8.0%
- Cash Flow Growth Rate: 10% (Base Case), 13% (Bullish Case), 15% (Very Bullish Case)
- EBITDA: $1,225 M
- Current Stock Price: $84.07 (12/30/2021)
- Tax rate: 30%
Risks
The single largest ongoing risk for Logitech, as for many companies right now is the ongoing supply chain crisis. They suffered from lack of inventory early in COVID, and lost some market share in their creativity and productivity segment. Management expects headwinds due to higher logistic costs going forward, but have strong long-term supplier relationships which should help them maintain inventory. They also fully own their own production facility and this should help as well. They will seek to recapture market share as supply chain disruptions settle.
They operate within a highly competitive market and may find themselves competing against larger OEMs if the segment becomes large enough. This may be particularly true for the video conferencing segment. The sub-markets for many of the peripheral and productivity segments are fairly small, which often discourages an OEM from entering the space. Logitech's extensive design experience enables them to handily outperform commodity competitors. Furthermore, Logitech is increasing their R&D spending to maintain their market dominance in these segments.
Conclusion
Logitech is an excellent company with strong brand recognition. They experienced a bumper year at the beginning of the pandemic lock-downs as people equipped their home workplaces. Market growth is now slowing. The market appears to be over-penalizing them for this slower growth, and P/E is at historically low levels. Despite the inevitable slowdown in growth now happening, the global market for peripherals is expected to grow in a long run. Logitech has a bright outlook with market leading positions in video conferencing equipment, productivity, and gaming peripherals. I believe they are attractively priced with 20-40% upside.