Why the Google TV Opportunity May Be Overrated

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Logitech International (Nasdaq: LOGI  ) . Is this consumer electronics manufacturer the real thing? Let's get right to the numbers.

Foolish facts

Metric

Logitech International

CAPS stars (out of 5) *****
Total ratings 939
Percent bulls 96.5%
Percent bears 3.5%
Bullish pitches 128 out of 136
Highest rated peers Super Micro Computer, LENOVO GROUP, Concurrent Computer

Data current as of Nov. 27.

For me, it's easy to appreciate Logitech. We've entered a new Golden Age for digital devices. This Swiss maker of mice, keyboards, remote controllers, and other geekery has never been more necessary.

Wall Street knows it, too. Analysts are projecting 15.5% annualized earnings growth for the next five years. What they're not projecting is a short-term rally in the stock price; Logitech closed the day at $20.12 per share. Wall Street's average 12-month price target is $19.67 a share, according to Yahoo! Finance.

Some of our top Fools believe Logitech can do better than that. All-Star investors caslonsvcs and TheBottomIsNow have bet on the stock in CAPS, and at higher prices than the stock traded for at the time of this writing.

Why? Google (Nasdaq: GOOG  ) may have something to do with it. The Swiss device maker believes it will double revenue to $5 billion annually by making remotes and other add-ons for Google TV.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth 423.1% (40.2%) (51.2%)
Revenue growth 18.5% (11%) (6.8%)
Gross margin 35.5% 31.9% 31.3%
Receivables growth 17.4% (8.7%) (42.7%)
Shares outstanding 176.8 million 175.2 million 179.5 million

Source: Capital IQ, a division of Standard & Poor's.

But Fools needn't wait for Google to get interested in Logitech. According to this table, a turnaround is already well under way. Let's review:

  • Revenue and normalized net income have skyrocketed after two consecutive years of subpar growth. Google TV should help sustain momentum.
  • Big improvements in gross margin suggest that Logitech has regained pricing power it had a premium supplier of artfully designed gadgetry.
  • Receivables are growing again, but at a slower pace than overall revenue. The message? No accounting gimmicks needed; Logitech is capitalizing on a legitimate growth opportunity.
  • Shares outstanding are up from last year, but down significantly from 2008. If the bulls are right and Logitech is cheap, today's common stock repurchases will deliver a healthy dose of value to long-term shareholders.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 yrs.)

Cisco (Nasdaq: CSCO  ) (0.6%)
Logitech (16.9%)
Philips Electronics (NYSE: PHG  ) (19.6%)
Plantronics (NYSE: PLT  ) 23.1%
Polycom (Nasdaq: PLCM  ) (9.9%)
Sony (NYSE: SNE  ) 5.7%

Source: Capital IQ. Data current as of Nov. 27.

Skeptics will have a field day with this table, and rightfully so. Logitech has been a poor earnings performer when compared to peers, and seeing this data reminds us that Logitech's turnaround will take time to complete.

Grade: Unsustainable
What happens after revenue doubles and interactive TV devices enter Logitech's product portfolio is a matter of speculation. Yet I wouldn't bet on this being a long-term growth story. A history of inconsistent revenue and earnings gains says it won't be.

Now it's your turn to weigh in. Do you like Logitech at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on Logitech. Add it to your watchlist by clicking here.

Logitech International is a Motley Fool Hidden Gems pick. Google and Polycom are Motley Fool Rule Breakers recommendations. Google is also a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers write a covered strangle position in Logitech. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has written Cisco calls and owns shares of Google and Logitech. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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