Zebra Technologies' Q3 in Black and White: 19% Earnings Growth

Data organization expert Zebra Technologies (ZBRA +11.46%) reported third-quarter results early Tuesday morning. The company, best known as a global provider of bar code scanners and related data management tools, posted a solid earnings surprise thanks to strong market interest in data capture devices and support services.

Zebra Technologies' third-quarter results by the numbers

Data source: Zebra Technologies. GAAP = generally accepted accounting principles.

What's new with Zebra Technologies?

• Your average Wall Street analyst had been looking for adjusted earnings of $3.28 per share on revenue near $1.14 billion. Zebra beat the earnings target while falling just short of the revenue view. Management's guidance for this quarter called for earnings of $3.25 per share on $1.13 billion in top-line sales.
• You could call this a mixed report from a certain angle, in a certain light, but investors preferred to focus on the upside instead. Zebra's shares closed Tuesday's trading 6.7% higher.
• Solid sales growth in North America and the EMEA region (Europe, Middle East, and Africa) made up for weak orders in China. The Asia-Pacific reporting region, which is where Chinese operations fall in Zebra's SEC filings, accounted for 12% of the company's total sales in 2018 and 13% in the second quarter of 2019. We don't have hard data on the company's geographical results for the third quarter yet, but chances are that the Asian portion will remain relatively stable.
• You see, Zebra is working on a mitigation strategy for the current and upcoming slates of tariffs on products crossing the Chinese border. Products affected by the first three tariff lists include certain bar code scanners, accessories, and components. The China-based manufacturing lines for these items have been duplicated in other pan-Asian locations so the mitigation effort won't change Zebra's business mix in terms of reported geographical regions. The production is simply moving from one Asian country to a handful of others.
• The fourth tariff list would result in more than $100 million of annual tariffs for Zebra if nothing else changed, so the company is executing a similar mitigation strategy for that slate. This effort should be complete by the middle of 2020 and it doesn't matter if the politicians decide to settle their differences before then. Zebra will still finish the project in the name of risk-lowering diversification.
• In a separate press release, also issued on Tuesday, Zebra announced that the U.S. Postal Service has selected Zebra as a key provider of mail-tracking hardware and software. The company expects to ship 300,000 TC77 ultra-rugged mobile computers into this project in the first half of 2020. It's the largest single-customer contract in Zebra's history, structured as a multi-year agreement where the TC77 shipments only constitute the first stage of a more substantial partnership.

Zebra's current lineup of handheld computers including the TC77, bottom right. Image source: Zebra Technologies.

What management wanted to say

On the earnings call, Zebra CEO Anders Gustafsson highlighted what modern data management can do for various types of customers.

"More than 80% of manufacturers plan to implement just-in-time operations within the next five years. Being able to stock only the items they need reduces inventory cost and waste," Gustafsson said. "The global healthcare system is facing significant challenges, including staff shortages, rising costs and life-threatening medical errors. Health care providers are turning to Zebra's technology to improve patient safety, increase staff workflow efficiency, and comply with new regulations."

Looking ahead

For the fourth quarter, Zebra's management expect roughly 5% year-over-year revenue growth for a final reading of approximately $1.20 billion. On the bottom line, adjusted earnings should stop near $3.65 per diluted share -- something like 18% above the year-ago quarter's result. The revenue projection was in line with the current analyst consensus but the earnings guidance landed significantly above the Street estimate of $3.58 per share.

The previously presented full-year guidance targets were largely left untouched, apart from a slight tweak to the top-line figure. Full-year sales growth is now expected to be at least 6% year over year, arguably not really changed from the existing forecast of 6.5%.

Zebra's shares have now gained a market-beating 37% over the last 52 weeks. The stock is trading at historically high multiples such as 18 times free cash flows and 7.7 times the company's book value, but you could also call it affordable at 16 times forward earnings.