Foolish Forecast: Logitech's Illogical Numbers

Breaking with recent tradition, Swiss computer peripherals producer Logitech (Nasdaq: LOGI  ) committed the cardinal sin of merely meeting analyst consensus earnings targets back in April -- and suffered an 8% haircut in punishment. Will it start its new fiscal year (it reports Q1 2008 earnings tomorrow) better than it ended the last one?

What analysts say:

  • Buy, sell or waffle? Nineteen analysts now follow Logitech, three more than last quarter, and seven more than just six months ago. Fully 15 of them rate it a buy, three more say hold, and there's just one seller.
  • Revenues. On average, analysts expect to see 12% sales growth to $439.6 million.
  • Earnings. Profits are predicted to increase by a penny to $0.17 per share.

What management says:
Although generally "pleased with [Logitech's] solid performance in FY 2007," CEO Guerrino De Luca joined in the lamentation on Wall Street over his firm's "unexpected ... slowdown" in webcam sales -- an occurrence that market pundits by and large attributed to a push by Microsoft (Nasdaq: MSFT  ) to capture market share. De Luca promised to "reignite webcam market growth" going forward, however, which I guess will allay the concerns of those who were worried about this in the first place.

What management does:
Notice how I implied that I am not concerned by webcam sales, which are just one of many revenue streams flowing into this company's coffers? The reason for my disinterest lies in the table below, which shows a 200 basis-point improvement in gross margins, and rising operating and net margins as well. Financially, Logitech is going gangbusters, and still producing operating margins far in excess of rivals such as Nam Tai (NYSE: NTE  ) , Creative Technology (Nasdaq: CREAF  ) , and Plantronics (NYSE: PLT  ) .

Margins

12/05

3/06

6/06

9/06

12/06

3/07

Gross

32.3%

32.0%

31.7%

32.5%

33.7%

34.3%

Operating

11.0%

11.1%

10.6%

10.9%

11.5%

11.2%

Net

9.8%

10.1%

10.2%

10.4%

11.1%

11.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
What does worry me -- as I explained in last quarter's earnings write-up -- is the fact that Logitech's costs are getting out of hand, all but erasing its gross margin improvements by the time we reach bottom-line net margins. Forty-nine percent general and administrative cost growth on just a 15% rise in revenues? That's unconscionable.

Even worse, perhaps, is the fact that marketing costs, which look almost tame in comparison at 23% growth for fiscal 2007, may well grow even faster in the quarters going forward as Logitech struggles with the bully from Redmond for webcam supremacy. According to De Luca, "reignition" of "webcam market growth" will hinge on "targeting ... marketing activities toward growing the overall category." Whether this means redirecting existing marketing dollars to webcams at the expense of other product marketing, or accelerating marketing spending overall, I suspect we'll see tomorrow that these costs have outrun sales growth once again. Yet management expects this still to result in just 15% sales growth this fiscal year -- the same as last year.

Put it all together, and it seems we're being promised the following in fiscal 2008:

  • Slowing sales growth.
  • Higher expenses (and consequent margin compression).
  • A tax rate 20% (200 basis points) higher than it paid last year.

So someone please tell me: Why is the stock once again trading at the price it fetched before last quarter's "bad" news?

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy makes perfect sense.


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