Logitech (NASDAQ: LOGI): thought it’s interesting. Conflicted name
with a stigma. Cheap. Just beat numbers, aligned mgmt, and some good drivers
working for them.
Thesis:
·
25% of mkt cap in cash w/ dividend pending.
10% Price / Cash-flow with 1Q14 already showing signs of turning
·
New CEO started in Jan 2013 w/ 1.7 mm stock
option vesting in 4 years at 2-3x current stock price.
·
R&D departure proves its ability to top
the Mobile landscape w/ iPad accessory blockbuster.
·
Decrease R&D in legacy line-up + cost
cutting should boost margin to 4-6% 2 years out.
·
At 12x multiple in 2015-16 with some
share buy-back. This can be a $12+ stock if things work out (40%+ upside)
Key
Risk:
·
PC Gaming cycle may be peaking w/ next gen
console coming out competing for gamers’ dollars. Hard to quantify absolute
impact, but the mgmt’s assumption in 20% CAGR may be too aggressive.
·
End of iProduct dominance means more R&D
in more products with different configurations and molding. Could mean slower
inventory turn and higher fixed OpEx and CapEx due to lack of scale in
individual line-ups.
·
PC sales. People are bearish for the right
reason and perhaps no one knows where the eventual run-rate is. One would think
LOGI can capture a bigger share there, but being semi-luxury in a smaller
market doesn’t seem too ideal for the bottom-line
Details:
They
make mice, keyboards, audios, headphones, and video conference devices. Taint
w/ PC, perhaps rightfully so, has knocked Logitech down. Their legacy business
in traditional video and PC peripherals had been declining at ~-15% YoY and is
now suffering the poorest operating margin in history (~1% vs. ~10%
historical). Seems like there is no future in making these accessories right?
What’s interesting here?
·
Cheap on a CF basis. ~$1.2 bn market cap
(Once $3 bn+) but has $300 mm in cash. Consistently generate $150-250 mm in
operating cash flow. Even in 2012, they did $100 mm. That’s >10% CF yield
for a company that is struggling.
·
Stumbled in 2009-2012 when the firm devoted
~$100 mm R&D into developing a remote control (Renue) for Google TV.
Turns out to be a blunder and under-spent in their core business. As a result,
they had a dated product line-up in 2011-2012 particularly in video gaming and
headphones. The company recognized its mistake and is playing catch-up in
2012, but that means more R&D spending and marketing for new products.
Couple this effort with very weak PC sales and, the company was hammered on all
fronts. So they brought in a new CEO.
·
New CEO Bracken Darrell has received 1.7
mm stock options vesting in 4 years at 2-3x current stock price;
with 500k striking at $8.03, 400k at $14, 400k at $16, and 400k at $20. The
co-Founder Daniel Borel still owns 10 mm shares (6.6% outstanding).
Additionally, for any bonus payments to be made under the FY13’s bonus plan,
Logitech stock price growth must be at least equal to that of the NASDAQ 100
Index. While all of the above may prompt myopic profit maximizing behavior, the
setup does spell good alignment…Source: http://www.sec.gov/Archives/edgar/data/1032975/000120677413002504/logitech_def14a.htm
·
Their R&D department still has the
edge against competition: the most recent products like the iPad
keyboard only take time 3 month to develop (vs. traditional PC cycle of 1 year)
and garnered outstanding reviews and sales figures. Their growth segment
(mobile, head-phone, and PC gaming) currently account for 15% of sales (7% 2
years ago, or 40% CAGR), and if such research momentum continues while they
divest under-performing assets and maximize the golden tail in PC, the gross
profit should be fairly robust going into 2014-2016.
·
R&D tapering & SG&A cost
restructuring likely to reap benefit into 2015:
They took a $43 mm restructuring charge in 2012. Going forward, as the R&D
in legacy business goes off-line, marketing effort of new line-up goes in
place, and fat being cut, we are looking at a business that can have a
semi-healthy 4-7%+ operating margin again (150mm 2016E per management).
Recall that LOGI used to be a 10-15% EBIT/IC business that generates $100-250
mm FCF/Net Income per annum with minimal CapEx spending (~$40 mm or 2-3%
sales). Shares traded at 15-25x P/E and 10-15x EV/EBITDA. Assume a 12x multiple
with 150 mm shares outstanding after buy-back, LOGI can be at least a $12 stock
in 2-3 years.
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