Logitech Analysis_Part 1

I've noticed that my keyboard, mouse, and cap are all Logitech product, this gives me an interest to analysis on this old company. After reading an industry report on peripherals, I discovered this sector is expected to grow at a CAGR of 7.68% over the next five years, reaching a total market value of $55 billion. In the lasted financial release, Logitech's third-quarter reveals a recovery in revenue growth, with management expressing confidence in their gaming unit. The new CEO, Hanneke Faber, releasing conservative market opinions, especially after a recent slump in share prices, I think Logitech has adopted a more financially prudent position and declined a financial miss risk in the future.

Logitech has multiple product lines, I divide its product portfolio into four main units. The first is Gaming, which includes PC and console peripherals such as keyboards, mouse, driving simulation equipment, and table accessories. Gaming is the largest unit and account for about 30% of total revenue. The second is Office & Education, which includes accessories for PC, meeting and study rooms equipment, like webcams, microphone, keyboards and mouse. Benefiting from the recent trend of working and studying from anywhere, this Unit achieved significant growth in past two years. The third is Content Creation, this Unit provide hardware and software products for content creators, like webcams, microphone, keyboard and software hub. This unit has tailwind of the surge in We-media. The fourth unit focuses on Headphones, providing products for a diverse customer.

Growth Ability

Logitech is defined itself as a growth stock due to its positive and highly volatile growth rate in history. The other sign is the operating profit has not grown at the same pace as revenue because continuous investment in growth opportunities, including new product development, R&D and acquisitions. Although the mismatch between revenue and profit growth is not good, given the stable gross margin and positive operating margin, I believe Logitech will keep growth trend in the future. Hanneke Faber has emphasized that growth is inevitable for Logitech, also indicating continued investment in this area. However, I believe the demand will slow down before next growth trend, this could pressure growth and valuation of Logitech, as investors, need keep watching its demand rebound and forward growth forecast by management.

Profitability

The discrepancy between revenue and operating profit highlights the low quality of revenue. However, Logitech's margins have been expanding, with enough gross margins and strong cash flow supporting high investment in its growth strategy. Despite fierce competition, maintaining a 40% gross margin is a proof of a significant advantage in its supply chain.

Profit Quality?

Logitech boasts high-quality net profit, with operating cash flow exceeding net income in much time. This indicates that profits can be converted into cash for capital investments and shareholder returns.

The Capex chart indicate the company focuses on reinvesting in new product development, market growth and supply chain to maintain its market position, which aligns with the growth analysis. Logitech's reinvestment ratio decline from 2021 because the operating profit boomed in 2021 with a high peripheral demand during Covid period. High reinvestment is expected to continue in the future as the new CEO still favour growth-oriented strategy. Good news is that Logitech has strong cash flow generation ability which can support its growth investment and shareholder returns like dividend and buyback, which is advantage for its future competition with peers.

Operating Efficiency

Logitech has improved its cash conversion cycle over the years, even reaching negative cash conversion days, indicating high turnover and supply chain advantages. Logitech added its inventory during Covid period to match the high demand and adopt volatile supply chain. Although inventory turnover declined in recent years, affecting overall efficiency, a decrease in inventory turnover days last year suggests improved inventory control and operational efficiency.

Asset Quality

Logitech's asset quality is high, with stable key asset ratios and normalized inventory levels. However, an increase in receivables indicates the need for more flexible sales terms on its sale channels to address rising market competition, potentially impacting operating efficiency and cash returns.

Solvency?Ability

With a high solvency ratios and low liabilities, Logitech build a strong balance sheet, this providing it with numerous competitive advantages over smaller & medium or newer brands players in industry. Its capital, diverse product portfolio with software integration, and efficient supply chain create high real barriers to entry for new competitors.

Investment Yield

Logitech's ROCE of 20% significantly exceeds its WACC, indicating high efficient capital investment. Logitech's share price is not cheap and I can see the market price-adjusted ROE is declining. ?

This is not bad thing for shareholders, because Logitech can offer total yield around 5% considering the share buyback effect and Logitech has strong cash flow and health balance sheet to support this yield.

Valuation

After rebounding from a low share price of $46, Logitech's valuation appears less attractive, with an EV/EBIT ratio of 22, much above the 20-year average of 15.66. A discounted cash flow model suggests a fair value of $99.90 per share, assuming a long-term growth rate of 5% and a discount rate of 8%. Despite potential growth trend in the gaming and PC markets and its high reinvestment in growth, I prefer to wait for a more attractive valuation before considering more investment. Anyway, Logitech can be a target in watchlist as impressive financial records and high competition advantages.

Conclusion

After vertical data analysis, I trust Logitech stands out for its diverse product range, strong brand reputation, robust cash flow, and healthy balance sheet. Its operational efficiency and substantial investment capacity enable it to maintain competitive advantages. I will do a comparison analysis next to generate a whole picture, and help investors fully understand the market position of the Logitech.