Logitech International's (LOGI -0.87%) share price jumped following its fiscal third-quarter earnings report last week. While total sales were down 2% year over year, one of Logitech's largest sales categories -- video conferencing products -- grew 24% over the previous quarter. This return to growth signals a deeply undervalued stock that is trading at its lowest price-to-earnings (P/E) ratio in over five years.
The stock is trading at a P/E of 18.3 following the post-earnings pop. This is low for a business with a history of growing sales and earnings. Between the end of calendar 2014 and 2019, earnings per share more than doubled on the back of growing demand for computer peripherals, especially in growing markets like gaming and video collaboration.
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Returning to growth
Logitech experienced a bit of a hangover from the mad rush to buy mice, webcams, pointing devices, and other remote work essentials during the pandemic in calendar 2020. After the company reported triple-digit levels of sales growth from products catering to remote workers in the year-ago quarter, growth has flattened out in recent quarters. The stock price fell 23% in the last six months, but this statement from CEO Bracken Darrell during the fiscal Q3 earnings call signals that growth is starting to return:
In video collaboration, we're starting to see some increased activity in our office reopenings and hybrid work planning. Video collaboration sales improved this quarter, nearly equaling last year's high levels [...] when sales more than tripled.
The following slide from the company's earnings presentation shows its largest sales categories of over $200 million either maintaining or growing off the high demand levels from a year ago. The market is undervaluing Logitech's larger customer base it gained during the pandemic.
Image source: Logitech International.
Logitech has huge brand potential
Market participants are overlooking a key quality about Logitech that makes the stock a great long-term investment. Under Darrell's leadership, Logitech has raised its product design to a level that even Apple might be proud of. The company has turned mundane products like mice and keyboards into colorful objects that are fun to use and pleasing to the eye.
Logitech's recent launch of the M650 mouse is a good example. It's a wireless mouse that features silent clicks, an aesthetically pleasing design, and comes in a range of colors.
Image source: Logitech International.
The market for these products is quite large. The company estimates there are over a billion knowledge workers globally who either don't use a mouse or own a mouse that could be due for an upgrade. Investors are missing the potential for Logitech to turn computer mice into items that people want to display on their desks and not just buy out of necessity.
The company increased its marketing and selling expense by 32% last quarter, which contributed to a decline of 41% in operating profit. However, the extra marketing is intended to raise awareness for products like the new M650. "We still have a lot of opportunity with just increasing the awareness of how nice these products are and what a great experience it is," Darrell said.
Logitech has a sound business
On the finance side, Logitech has all its ducks in a row. It's got $1.3 billion of cash sitting in the bank with no debt. It paid out 25% of its free cash flow in dividends over the last four quarters. A combination of a recent 10% increase in the dividend and a lower stock price has raised the dividend yield to 1.16%.
Moreover, Logitech is ramping up its spending on research and development (R&D). The recent 40% increase in R&D spending, along with the 24% sequential increase in video collaboration sales, points to strong demand for Logitech's products. At less than 20 times earnings, this growth stock is wildly undervalued.
