Readers have doubtlessly noticed that Logitech's stock is being pummeled today. At one point, shares were down more than 14%; they're still 13% lower as I write this. The decline most likely results from Logitech's announcement that earnings per share (EPS) came in at only $0.71, almost 9% below analyst estimates. It hardly helped that the company's sales fell 3% below forecasts.
Logitech did report year-over-year sales growth of 18.6% and diluted EPS growth of 7.6%. However, a closer look casts doubt upon the quality of that earnings growth; the company's 25.1% growth in accounts receivable and 38.5% growth in inventory both outpaced sales growth. I'm particularly concerned by the inventories, which grew more than twice as fast as sales.
Logitech's margins were even more worrisome. Gross, operating, and net margins all declined from last year, though gross margins were up sequentially from the second quarter. The shrinking margins are important because the company has numerous competitors in nearly every market in which it operates, all constantly unveiling new products. In the mouse, keyboard, and trackball market, the company bumps up against Microsoft (NASDAQ:MSFT), Belkin, and many smaller firms. Plantronics (NYSE:PLT) competes with Logitech for headset sales, while Creative Technology (NASDAQ:CREAF), Sony (NYSE:SNE), and numerous others all vie for a piece of the speaker market.
Investors should continue to pay close attention to Logitech's inventory and accounts-receivable balances going forward -- particularly the strength of their growth relative to sales. The results weren't impressive this quarter, but one quarter does not a trend make. Logitech still expects to deliver at least 20% sales growth for all of fiscal 2006 (ending March 31).
The shares look fairly valued here -- if the company can manage free cash flow growth of about 10%. If margins and inventory balances improve, then free cash flow growth should slightly exceed that figure, and today's sell-off will look overdone. Given the competitive nature of Logitech's business, I don't yet feel confident that such free cash flow growth is attainable. If you disagree, the shares look somewhat attractive, and today's price slide could represent a buying opportunity.
Further high-tech Foolishness:
Microsoft is aMotley Fool Inside Valuerecommendation.
NathanParmelee owns shares in Microsoft but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
