One of the most basic tenets of value analysis can be summed up by a sound bite offered by the Oracle of Omaha himself, Warren Buffet: “I want to buy a good company at a nice price.” The idea sounds simple enough – but I always find it interesting to see so many different approaches and attitudes about what a “nice price” actually means. That’s because there is no single method that can be applied to identify whether a stock’s current price is likely to represent a good value versus what it will be in the future. Since we can’t see into the future, every method is really just not much more than an educated guess, and the fact is that if we all venture a guess about something, we will probably each have a different guess.
Another element, of course that always plays a role in the evaluation of whether a stock is a good opportunity right now is the simple state of the market and the economy right now. This is even less predictable, because if you want to be a pessimist, you can just about always find something to be pessimistic about, and if you want to be an optimist, you can just about always find something to be optimistic about. It’s the classic push and pull of bearish vs. bullish momentum and sentiment. That’s a big reason that I beyond the fundamental measurements and valuation metrics that I rely on to determine how much a stock should be worth, or whether or not that evaluation is realistic enough to be useful, I also like to incorporate technical analysis concept like trend identification, Fibonacci retracement levels and pivot lows and highs as well.
One of the big elements that is driving market momentum right now is the uncertainty surrounding trade. This week investors have seemed to be very intent on looking for reasons to be hopeful, using indications that the U.S. and Mexico are having productive discussions to avoid the 5% tariffs threatened late last week by the Trump administration as a reason to bolster market prices. There is still a long way to go to see any real, useful resolution in this regard, however, and the fact is that China is going to continue to be a thorn in the side of the market for as long as tensions on that front persist. That means that some stocks that even Warren Buffet would call a “good company” are still likely to see quite a bit of price volatility for the foreseeable future.
Logitech International S.A. (LOGI) is a Switzerland-based company that I think anybody that owns a PC should be familiar with. Whether you’ve used Logitech mouse or keyboard, or speakers, or gaming headsets, the truth is that this is a company with a diversified product portfolio that is designed specifically with the consumer in mind. As I think you’ll see below, the fundamentals for the company are pretty solid, with a conservatively managed balance sheet that I think gives the company a lot of flexibility to keep innovating and remain a major player in their industry. It is also true, however, that most of their products are manufactured in China, making them a prime target for the effect of tariffs. That reality is something that does look like it is causing a dent in their fundamental profile right now – and even though the stock is down about 11.5% since late April from trade concerns, and about 26.5% since reaching a 52-week high in August of 2018 at around $50, I think there is room for even more downside.
Fundamental and Value Profile
Logitech International S.A. is a holding company. The Company designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms. The Company operates through peripheral segment. The Company offers its products to a network of domestic and international customers, including direct sales to retailers, e-tailers, and indirect sales through distributors. The Company’s retail network across the world includes consumer electronics distributors, retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. Its music solutions are focused primarily on mobile speakers, including its UE BOOM family of mobile wireless speakers, its Jaybird wireless audio wearables for sports and active lifestyles, and its custom in-ear headphones. It offers a range of gaming gear for gamers, including mice, keyboards, headsets, gamepads and steering wheels.LOGI’s current market cap is about $6.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 24%, while sales grew by about 5.4%. In the last quarter, earnings turned negative by -57.5% while revenues dropped almost -28% – a reversal that I think has a lot to do with the company’s China exposure. LOGI operates with a generally healthy, but declining margin profile; Net Income versus Revenues over the past year was 9.23%, but decreased in the last quarter to 6.74%.
Free Cash Flow: LOGI’s free cash flow is mostly unremarkable, but adequate, at a little more than $269 million. That translates to a Free Cash Flow Yield of 4.46%.
Debt to Equity: LOGI has a debt/equity ratio of .0. The company has no long-term debt to speak of, which is a source of strength and a useful counter to their unimpressive Free Cash Flow. It also implies that while deteriorating Net Income is not a positive, they are more favorably positioned to weather that situation than companies with a high level of debt. It is also useful to note that LOGI’s balance sheet shows almost $605 million in cash and liquid assets as of the most recent quarter.
Dividend: LOGI pays a dividend of $.69 per share, which translates to an annual yield of 1.87% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for LOGI is $7.16, and which translates to a Price/Book ratio of 5.12 at the stock’s current price. The stock’s historical average Price/Book ratio is 4.58, which means the stock is overvalued by about -10.5%. It also puts the stock’s value-based, “bargain” price in the $26 range – or about -30% below the stock’s current price.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from August of last year to its bottom at the end of December. It also informs the Fibonacci retracement lines shown on the right side of the chart. The stock rose impressively through April from its trend low at $29, to an intermediate-term peak at almost $42 before dropping back in the last month to its current level. The stock is currently sitting just a little below its 38.2% retracement line at about $37. If the stock can break above $38 per share, it should have enough momentum and room to run back near to its April high between $41 and $42 per share. On the other hand, the stock is also just a little over $1 per share above its pivot low from just a few days ago at around $35.50. A drop below that level would mark a support break that could give the stock a significant amount of bearish momentum, with the next likely support level being somewhere between $32 and its trend low point at around $29.
Near-term Keys: LOGI is a stock with a solid fundamental profile despite some of the holes in the form of declining Net Income and negative results in the last quarter. The fact that the stock is -30% above its “bargain” price, given the stock’s current negative momentum and broader market conditions that I think are likely to remain bearish for the time being mean that there is a lot more downside risk in the stock right now than there is upside. From a short-term perspective, that means that I wouldn’t take a bullish trade, either with the stock itself or with call options, seriously unless the stock manages to break above $38 per share – and in that case, once the stock reaches the $41 to $42 level, I would look to take profits immediately. The higher probability trade is on the bearish side, with a push below $35.50 as a clear signal to consider shorting the stock or buying put options with a target low price between $32 and $29 per share.
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