Considering the piles of its computer accessories -- keyboards, mice, and so on -- littering my real-world desktop and enabling me to surf my computer monitor's desktop with ease, it's about time this Fool took a look at Swiss tech firm Logitech (NASDAQ:LOGI). With the firm releasing its third-quarter 2006 earnings report Wednesday (after the market closes), today looks like as good a time as any to do so.
If you own a computer, chances are you're already quite familiar with this company's optical mice and keyboards, webcams and headsets -- all of which help make communicating with our computers a bit easier. What you may be less familiar with, however, are the company's numbers.
At first glance, the numbers look pretty darn good. In each of the last four quarters, Logitech has managed to "beat" analyst estimates for its quarterly earnings by margins ranging from a penny to a nickel. But extending that string of wins may get quite a bit trickier on Wednesday. Analysts are calling for the company to post 18% year-over-year earnings growth on an expected 22% increase in sales. Those are lofty expectations indeed, and help to explain why investors value this company at nearly 30 times trailing earnings, despite analyst expectations that the firm will only grow those earnings by 5% next fiscal year.
Just because the expectations can be explained doesn't mean they're realistic. Yes, Logitech has performed admirably over the last year, but in this Fool's opinion, things are starting to look very bad at this company from an investor's perspective.
Consider: In the firm's latest earnings report, it was revealed that sales grew 27% in H1 2005 vs. H1 2004. Yet over the same time span, inventories galloped ahead 37%, while accounts receivable spiked 38%. As a result of this disconnect, Logitech's free cash flow fell to negative $54 million for the first six months of the year -- a striking reversal of the $14 million in positive free cash flow generated in the year-ago period.
Is it channel-stuffing we're seeing here? Lousy inventory management? At this early stage of my review of the company, I cannot yet say for sure. But it certainly does not look good. Beware, Fools. Much as I love Logitech's products, Logitech's stock looks ripe for a fall.
Fool contributor Rich Smith does not own, nor is he short, shares of Logitech.
