Barcode-scanning and data management expert Zebra Technologies (NASDAQ:ZBRA) delivered a fantastic third-quarter report last week. Sales rose 30% year over year to $1.44 billion. Adjusted earnings jumped 39% higher, landing at $4.55 per diluted share. To put these numbers in perspective, your average Wall Street analyst would have settled for earnings near $4.06 per share on revenues in the neighborhood of $1.40 billion.
And Zebra achieved these impressive results while battling several significant headwinds, including the ongoing battle against COVID-19 and a global shortage of semiconductor products.
The Fool had a brief phone chat with Zebra CEO Anders Gustafsson about this report. We focused that conversation on how the company was able to sidestep the prevailing business headwinds in the second half of 2021.
A four-part strategy
The mitigation effort involves four main strategies, Gustafsson said.
- Assembly plants had to be up and running, no matter what. The supply chain is resilient to local health crises and labor shortages by design. The company recently opened up assembly plants in Malaysia, Taiwan, and Vietnam in order to work around the border-crossing tariffs on devices made in China. When the barcode printing business in Malaysia essentially shut down in Q3 due to a local coronavirus outbreak, Zebra was able to shift its production back into the old Chinese factories instead.
- When forced to choose between slow product delivery at a low cost or quicker turnaround at a higher cost, Zebra always picks the quicker and more expensive option. Replacing ocean liner freight with air delivery added $55 million to the company's operating costs in the third quarter, but product deliveries were on time. "It's less about being able to find the capacity," the CEO said. "It's more about the cost of getting things done."
- A large portion of Zebra's engineering team is currently reviewing the current product lineup to see where components with long lead times can be replaced with parts from a chip maker with faster order deliveries.
- When the chip shortage started, many builders of electronic devices were quick to reduce their chip orders and projections or future demand. Zebra didn't do that, and actually increased its order forecasts to chip suppliers instead. "We've also worked very closely with semiconductor partners to let them know what our true demand is likely to be, to try to secure longer delivery commitments," Gustafsson said.
Great management creates shareholder-friendly results
The message is clear. Zebra unlocked exceptional results by planning ahead, building a flexible supply chain, and insisting on doing the right thing even if that means higher costs. You have to pay money to make money, especially during periods of challenging infrastructure issues. That focus on creating long-term value despite short-term challenges is music to my ears.
This wise management philosophy has created lots of wealth for Zebra's shareholders. The stock has gained 72% over the last 52 weeks, 231% in three years, and a staggering 822% in five years. Even after these market-stomping returns, the stock doesn't look terribly expensive at 31 times forward earnings and 26 times free cash flows.
Zebra Technologies stands to benefit from the increased automation and data-based business processes that emerged in response to the pandemic, and that flywheel should keep gaining momentum for years after the health crisis fades out. Zebra looks like a solid buy today if you can stomach the lofty valuation.