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MarketScreener Homepage  >  Equities  >  Swiss Exchange  >  Logitech International S.A.    LOGN   CH0025751329

LOGITECH INTERNATIONAL S.A.

(LOGN)
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Logitech International S.A. : Thwarted all predictions

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09/25/2019 | 04:50pm EDT

Logitech is a leading manufacturer of computer peripherals. The Swiss group, that was mocked by analysts for a long time and even assumed to be dead several times, hasn’t stopped thwarting the forecasts.

Although faced with a difficult industry - because it is hyper-competitive, free of entry barriers and dominated by low-cost Asian manufacturers - the company’s management has been able to do well thanks to a well-thought-out strategy.

 

Upstream, Logitech continues to attract users with a top-of-the-range product catalog designed by teams of experienced designers - some of whom have been recruited from Nokia or Samsung - and regularly praised by the specialized press.

This almost "luxury" positioning allows Logitech to sell its peripherals - keyboards, mice, joysticks, headphones, webcams, and speakers - at prices well above the market, resulting in much higher gross margins than those of its competitors.

The fact that the company was able to defend this relative pricing power over the years is an achievement in itself and deserves to be applauded. It is not unlike the case of Bang & Olufsen, which also manages to avoid standardization through an ultra-luxury positioning.

Downstream, the company’s management is characterized by a very strict cost control and a generally well-informed capital allocation. The profits were used for share buybacks when the share price warranted it, and to pay dividends when the share price had gone up again; and, for the past three years, to make various high potential acquisitions.

An event worth mentioning in this new phase of growth and which a priori shows the management’s discipline is the following: while Logitech’s management considered buying the American company Plantronics for a long time, they eventually decided against the acquisition due to the excessive amount of the transaction, estimated between $2.5 and $3 billion, more or less the equivalent of Logitec’s sales. 

At a financial level, the company’s cash generation is satisfactory thanks to a good management of the working capital requirements, while the accounting profits are easily reconciled with the cash flows; the income statement is, therefore, a reliable indicator of the company's performance.

The external growth strategy seems to be well established, since the $420 million invested in acquisitions over the last three years has added $700 million to the sales (from $2.1 billion in 2014 to $2.8 billion in 2019) and quadrupled the profits (from $74 to $258 million) next to a sluggish organic growth.

The returns on investment are therefore excellent. For recently acquired brands such as Astro, Jaybird and Saitek, Logitech offers a global platform - and a solid distribution network - that allows them to double or even triple their sales almost instantly.

(The reference in this matter remains the acquisition of Beats by Apple, which was criticized at the time but made profitable in less than three years).

The group maintains a minimal capitalization - some would say optimal - without debt or dormant cash on the balance sheet. Apart from the $150 million retained for the increase in working capital and the budget allocated to acquisitions, all excess cash was returned to the shareholders via dividends.

We appreciate the common sense of management, which means they are opportunistic, with share buybacks when the share price is down, but now focused on distributions since the valuation levels have gone up between 20 and 30 times the profits.

If it were necessary to leverage in order to make a transformative acquisition, particularly in the gaming or enterprise services sector - two areas in which Logitech enjoys an excellent brand image - the group would have the necessary flexibility to convince its creditors and borrow at preferential rates.

We can also give credit to the management for meeting the ambitious objectives set a few years ago. No one believed those objectives would be met, but everyone underestimated the people involved.

The only thing that casts a shadow over this success story - and this notwithstanding their exemplary achievement - is the compensation of the management which is perhaps a little excessive; let’s note that none of the managers is a shareholder and that the stock options are exercised but the shares are immediately sold.

However, one of Logitech's particularities lies in its mysteriously low tax rate (less than 5%). The author didn't look into this, but it is possible that a compensation program generous in profit-sharing benefits from a tax exemption for a part of the profits - which would thus explain this.

On a commercial level, the company’s sales are stable in all the portfolio categories, although they are growing significantly in the gaming and enterprise services categories (videoconferencing, etc.). The gamer peripherals market represents about $4 billion: with only 15% of the market share, Logitech still has some ground to cover.

The management seems to think the same since it has just strengthened its design teams with some of the leaders in this field.

Logitech's blatant failure in the "Smart Home" category is noteworthy. The project was launched in 2015 and the management devoted only limited budget to it - probably to test the waters before considering deploying more resources - before retreating. Here too, we appreciate the management's measured and rational approach; the company’s withdrawal from this segment is by the way not necessarily final.

All these advantages should enable Logitech to stay away from the low-cost competition - which is certainly aggressive, but less well-known - and able to defend its territory well. At this stage, the main risk would be a failed or overpaid acquisition - the two often go hand in hand - because the group will have no choice but to integrate new growth platforms if it wants to sustain the high valuation that the market gives it now.

(The author is not a shareholder.)


Neelie Verlinden
© MarketScreener.com 2019
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Size 2020e 2021e
Capitalization 6 745 M $ -
Entreprise Value (EV) 6 014 M $ 5 834 M $
Valuation 2020e 2021e
P/E ratio (Price / EPS) 23,6x 21,0x
Capitalization / Revenue 2,28x 2,13x
EV / Revenue 2,03x 1,90x
EV / EBITDA 15,5x 14,1x
Yield (DPS / Price) 1,89% 2,06%
Price to book (Price / BVPS) 5,14x 4,53x
Profitability 2020e 2021e
Operating Margin (EBIT / Sales) 12,8% 13,4%
Operating Leverage (Delta EBIT / Delta Sales) 1,29x 1,63x
Net Margin (Net Profit / Revenue) 9,81% 10,2%
ROA (Net Profit / Asset) 17,0% 16,4%
ROE (Net Profit / Equities) 25,5% 24,3%
Rate of Dividend 44,6% 43,2%
Balance Sheet Analysis 2020e 2021e
CAPEX / Sales   1,54% 1,53%
Cash Flow / Sales 12,1% 9,64%
Capital Intensity (Assets / Sales) 0,58x 0,62x
Financial Leverage (Net Debt / EBITDA) - -
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Mean consensus BUY
Number of Analysts 8
Average target price 48,12  $
Last Close Price 40,52  $
Spread / Highest target 36,6%
Spread / Average Target 18,8%
Spread / Lowest Target 5,68%
Consensus revision (last 18 months)