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Thoughts on Logitech - 50% Upside and Growth in 2013

February 14, 2012 | About:
Chandan Dubey

Chandan Dubey

91 followers
It is very important to keep track of your investments and put the management to test by putting their words against their performance. Today, I want to talk about Logitech (LOGI) and I want to get a sense of the direction they are driving their business in. The meat of the report is taken from the third-quarter 2012 conference call and the subsequent Q&A sessions.

The most significant inhibitor to high sales is the product gap Logitech sees across all its categories. Particularly in the high-end product category that sells for more than $100, the gap is easily seen. Last year 24% of the sales were in this category and this quarter it was only 16%.

For example, we need many different remotes for different appliances at home — one for the TV, another for the DVD player, the music player and maybe more. Harmony One, which was launched four years ago by Logitech, had been quite successful. But Logitech has been quite late in bringing the next generation universal remote to the market. The biggest reason is that it was trying to bring the Logitech Revue (the Google TV box) to the market. As Logitech Revue is no longer on the cards, Logitech is making progress on the remote and expects to start shipping them in the fiscal 2013, which starts in three months.

Similar problems exist in the webcam and the digital music category. Most users find the embedded webcam in the laptop adequate and Logitech has not been able to shift them away to its own cameras. In a similar way, Logitech was targeting the PC speakers and the sound quality at the expense of mobility. The large and growing market on the other hand has shifted to mobile headphones and Logitech has re-targeted accordingly. We will see the results in fiscal year 2013.

Addressing product line gaps is a multiple-quarter process and Logitech expects to see substantial improvement in the second half of fiscal year 2013.

On the management side, Logitech had lowered their sales outlook four times during this year. The current revenue forecast is $2.3 billion. This revenue forecast comes when we are already one month in for the last quarter of the year.

On a geographical perspective, China has become very profitable for Logitech. The management expects to use the cash flow it generates to fund expansion in China. It has a new revolving credit facility worth $250 million and Logitech does not want to do any major acquisitions at the moment.

On a cash flow basis, Logitech has still been performing phenomenally. It has generated $150 million in OCF in third-quarter 2012 (ended Dec. 31, 2011) and has ended the quarter with $523 million in cash. They also have $177 million left in their existing share repurchase program and have all the regulatory approvals in place to begin repurchases on their second trading line. These shares will be cancelled.

I am long Logitech. I bought 150 shares at an average price $9.53. Logitech has been a very good cash flow generator and the balance sheet is fabulous with $500 million cash, $600 million tangible equity $786 million in total liabilities. At the current price of $8.5 a share (cap $1.5 billion), the EV is less than $1.8 billion. The FCF in 2010 was $325 million and in 2011 was $114 million. In short, it is a safe investment on a balance sheet level. On a valuation level I see a 50% upside from the current prices.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.1/5 (14 votes)

Comments

Cornelius Chan
Cornelius Chan - 2 years ago
Your analysis once again shows admirable due diligence. It is inspiring to observe a fellow individual investor listening in on conference calls and reading annual reports.

It would be interesting to read your analysis of Nokia: a beaten down blue chip with depressed share price yet delivering consistent dividend yield.
cdubey
Cdubey premium member - 2 years ago
Thank you for the kind words. I am currently trying to learn all I can about my few holdings and de-risk my portfolio by selling businesses which are not undervalued and or not good businesses. I wll keep Nokia in mind when I am done with my portfolio.
khaledmrd
Khaledmrd - 2 years ago
I agree that Logitech CEO said they are filling the Gaps in the mid & high end products in new fiscal year 2013 that start 1st April 2012.

For the Consumer Base, the Catalysts are Android 5, Apple OS X: Mountain Lion, iPad 3 & iPhone 5 & Windows 8

My Favorite for Logitech going forward are going beyond their Consumer traditional biz model to office

1st Logitech for Business Division and the +120 Value Added Resellers VAR added since July 2011 US program put, Canada & Europe program on the making

2nd LifeSize new Video communication Cloud Service and new LifeSize UVC Platform, the integrated, virtualized software platform for video infrastructure[url=http://www.computerworld.com/s/article/9224307/Hands_on_with_Apple_s_new_OS_X_Mountain_Lion][/url]
khaledmrd
Khaledmrd - 2 years ago
Hypothetically from my humble understanding, i think at a point we could see a spin-off of LifeSize from Logitech for these reasons:

1-Logitech kept A LifeSize CEO

2-A Seperate Sales and Marketing Organization

3-A Web Site

4-Lifesize Job posting and not through Logitech carrier posting

5-Logitech adding Value to Lifesize buy expanding the global channel and more global manpower and acquisition in the Unified Communication space like Mirial & Paradial... introducing new Cloud Services and Platform

The Video Communication & Streaming spaces are gaining momentum as Bandwidth technology evolving to support wired and wireless HD communication from Home, Office, School, Factory, Hospital......
khaledmrd
Khaledmrd - 2 years ago
shares repurchase already on going in 2012, 4m+ check Logitech site investor section sharerepurchase
cdubey
Cdubey premium member - 2 years ago
Thank you for your due diligence. I hope they continue buying shares at these depressed priced.

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