Zebra Back in the Saddle

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What a time to rediscover Zebra Technologies (Nasdaq: ZBRA)! After a year's absence, I just happened to check in on the company last week -- right before it reported earnings that sent the stock 14% higher.

What news spurred Zebra to such growth? Well, the short answer is that the company transformed 12% sales growth into a 50% year-over-year improvement in earnings per share for the fourth quarter. That, and the "earnings beat" it constituted, won Wall Street's approval this week. But seeing as this was the fourth and final quarter of the year, and it has been so long since we last looked at Zebra, today we'll take a step back from the short-term, Q4 view, and instead discuss how Zebra did over the course of 2007.

The year that was
Bigger profit margins were the key to Zebra's success last year: Today, they far exceed anything that less specialized printer makers like Hewlett-Packard (NYSE: HPQ), Canon (NYSE: CAJ), or Lexmark (NYSE: LXK) can put together. True, Zebra's gross margins grew slightly to 48%. But the real benefit came from Zebra not having to endure the insurance reserve and litigation expenses that hobbled its results the previous year. Free of those handicaps, operating margins raced ahead 590 basis points to end at 16.5% for the year.

The company further improved per-share results by buying back shares (and it plans more of the same), concentrating its profits among fewer shares outstanding. Put it all together, and Zebra parlayed merely respectable 14% sales growth into an amazing 60% improvement in per-share profits ($1.60 for the year).

The years to come
Of course, the question for investors today is whether Zebra will continue to improve. I believe it will. Zebra made three material acquisitions last year -- software firms WhereNet, proveo, and Navis. Of these, WhereNet has been one of Zebra's "stripes" the longest -- almost all of 2007, in fact. But the full benefits of buying high-grossing-software businesses proveo and Navis remain to be seen. proveo was incorporated in July, and Navis only in December. I suspect that we'll see margins improve further as these companies' revenues loom larger in the big picture. Add to that the margin improvements likely to result from Zebra's outsourcing of printer manufacturing to Jabil Circuit (NYSE: JBL) -- supposedly to better serve Far East customers like Nissan (Nasdaq: NSANY) and Digital China -- and I suspect Zebra's margins have more room to run.

What was Zebra up to when last we checked in on it? Find out in:

• A Tamer Zebra Looks to RFID
• Zebra Runs Wild: Fool by Numbers
• Foolish Forecast: Zebra Saddles Up