Zebra Technologies (ZBRA 11.75%) reported third-quarter results early Tuesday morning, exceeding Wall Street's expectations across the board. The stock was still down by 15.8% by 11:26 p.m. ET. Why did Zebra stumble and fall despite strong results and relatively rosy guidance targets?
NASDAQ: ZBRA
Key Data Points
Zebra's "beat-and-retreat" quarter
Zebra's sales rose 4.8% year over year, landing at $1.32 billion. Your average analyst would have settled for $1.31 billion. On the bottom line, the data management expert's $3.88 of adjusted earnings per share eclipsed the Street's $3.73 consensus. Looking ahead, management's fourth-quarter guidance also exceeded the current analyst views.
However, Zebra's guidance includes significant contributions from the buyout of Elo Touch Solutions, which closed Oct. 1 and may not be incorporated in most analyst forecasts yet. It's a fairly large deal, adding $8 billion to Zebra's addressable market.
So Zebra's rosy next-quarter targets are an apples-to-oranges situation. If you back out $100 million of expected Elo revenues from the official guidance range, the 9.5% year-over-year increase shrinks to just 1%. That ex-Elo growth target is well below the Street's 6.2% consensus estimate.
What's really behind Zebra's guidance?
So when you dig deeper and include the Elo buyout, Zebra is looking at a fairly muted fourth quarter.
On a quick call with yours truly, CEO Bill Burns characterized the direct impact of tariffs as a "rounding error," adding $8 million of costs to the bottom-line calculation. At the same time, the shaky economy is slowing down orders from many clients under tight budget pressure. Some accelerated their planned orders into the third quarter, shrinking the order pipeline for the next period to some degree.
"Our view of demand hasn't been much different in the second half than we had called out," Burns said. "From a second-half perspective and a full-year perspective, it's kind of playing out as we anticipated on the second-quarter call, which is organic revenue growth about 6% and then 16% is the number on organic earnings growth for the year without the acquisition."
So it's kind of business as usual, with significant pressure on Zebra's order books.
All told, the stock is down 32% year-to-date and trading at just 14.8 times forward earnings projections. This could be a great time to pick up Zebra stock on the cheap.
