I suppose it was too much to hope for a repeat. As you may recall, when Logitech
- Strong double-digit sales growth.
- Margins widening their lead over rivals like Sony, Nam Tai Electronics
(NYSE:NTE), Philips, Immersion (NASDAQ:IMMR), and Plantronics (NYSE:PLT).
- Evidence that Microsoft
(NASDAQ:MSFT)will not, in fact, eat Logitech's lunch in webcams.
Although Logitech posted even stronger sales gains Monday than it had three months ago, and continued to grow in profitability (tacking on 40 basis points in gross margin to arrive at 34.1%), the company’s stock price remained stagnant after the news.
So here's how the "good news" portion of the report read:
- Sales grew 18%
- Gross profits expanded 20% (thanks to the improved margin)
- Operating costs basically paced the growth in sales, rising 19%
- All of which added up to 24% growth in operating profit
Nothing wrong with that
Right. This all looks fine to me, but Wall Street has the shares cast in concrete -- they've barely budged since the news came out late Monday evening. The reason, I suspect, is that things didn't look quite so rosy on Logitech's bottom line. You see, while gross and operating results looked great, income from interest and "other" sources declined $1.7 million, or 36%, in comparison with the year-ago quarter. That negative comparison held back diluted earnings per share growth rate to a mere 14%.
So here's what's wrong: valuation
Now, management is confirming its guidance of 15% sales and operating profits growth this year, and predicts that about 34% gross margins will stick around all year long. Assuming that net income grows at the same rate as sales, this should work out to around $265 million or thereabouts in net profit this year -- giving the stock a current P/E ratio of about 22. Not bad for a 15% grower -- but not a bargain. My hunch, therefore, that it's the valuation keeping Logitech's shares in check.
But here's the thing: Logitech's much more profitable than it looks from a simple P/E point of view. Last year, the company "earned" $231 million as reported under GAAP -- but it generated $335 million in free cash flow. If that latter number grows at 15% this year, we could be looking at $385 million in free cash flow, and a price-to-free cash flow ratio of just 12.5 by fiscal year-end. Contrary to what Wall Street is telling you, folks, that's cheap.
What did we expect out of Logitech last time around, and what did we get? Also some other Foolishness. Find out in: