Tic-tac-toe, investors want to know: Will specialty printer-maker Zebra Technologies (NASDAQ:ZBRA) make it three in a row for earnings beats when it reports its fiscal fourth-quarter and full-year 2006 numbers tomorrow?

What analysts say:

  • Buy, sell, or waffle? Eight analysts now track Zebra, up two from last quarter. Three of them say to buy the stock, but holds are up to four, and we now have a sell as well.
  • Revenues. On average, analysts expect Zebra to report 9% quarterly sales growth to $194.8 million.
  • Earnings. Profits are predicted to rise a penny to $0.41 per share.

What management says:
Zebra's big news of the quarter came in the form of a $126 million deal to acquire privately-held WhereNet, expanding the firm's business from the realm of primarily passive RFID (radio frequency identification) into active RFID. To learn the difference between the two, and for more specifics on the technical aspects of the WhereNet transaction, read fellow Fool Tom Taulli's write-up here.

From an earnings perspective, the most important details on the transaction are as follows: Zebra expects the acquisition to be "minimally dilutive" to net income in 2007, "and be accretive thereafter." (In English, that means Zebra will earn less with WhereNet than it would have without this year, and will start reaping the benefits of its new prize in 2008.) I'd also point out that WhereNet's predicted sales of $50 million in 2007 represent nearly a 40% climb from last year's $36 million. For the record, that's more than three times as fast as analysts think Zebra proper will grow.

What management does:
One thing not addressed in the press release on the WhereNet deal is profits. As in, does WhereNet earn any? Because as nice as the extra revenues will be, judging from the trend reflected in the table below, Zebra could really use some help in the margins department. On both rolling gross and operating bases, the firm's margins have been slipping for well over a year. Zebra's net margins aren't looking so hot, either -- and caught a serious case of hoof-and-mouth disease last quarter, when the firm had to eat a $53 million charge to settle litigation with Paxar (NYSE:PXR).

Margins

7/05

10/05

12/05

4/06

7/06

9/06

Gross

51.2%

50.9%

50.4%

49.4%

48.7%

48.1%

Operating

24.6%

23.5%

22.2%

21.2%

21.2%

20.8%

Net

16.5%

15.9%

15.9%

15.8%

15.9%

11.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Legal costs aside, what else has been hobbling Zebra's margins? In a word, raw materials (OK, two words). Over the last two quarters, input costs at Zebra have risen twice as fast as sales -- 12% versus 6%. As great a job as the firm has done at controlling operating costs (held flat year over year), the gross margin compression is just killing these guys.

Meanwhile, things aren't much better over on the balance sheet. Accounts receivable grew 15% year over year during the same period (150% faster than sales), and inventories rose 24% (four times the rate of sales). Unsurprisingly, this lackluster working capital management dried up free cash flow to a trickle. Tomorrow, we'll want to look carefully at whether Zebra is doing anything to rectify these problems.

Competitors:

  • Hewlett-Packard (NYSE:HPQ)
  • Lexmark (NYSE:LXK)
  • Printronix (NASDAQ:PTNX)
  • Xerox (NYSE:XRX)
  • Sony (NYSE:SNE)

Fool contributor Rich Smith does not own shares of any company named above.