Is Logitech a buy at these levels?
Opdateret: 3. maj
I have previously written analyses of both Turtle Beach and Corsair. Hence, I thought it was time to investigate Logitech, as it has also been on a downtrend since its all-time high. The gaming sector interesting, as there are more than 3 billion gamers in the world, and Logitech could be the right company for you to get exposure to the sector.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own share in Logitech. However, I do own shares in Turtle Beach, which is one of their competitors. Turtle Beach is 2,94 % of my portfolio at the time of writing. Despite me owning Turtle Beach, I will keep this analysis objective. Logitech is listed both in the U.S. and in Switzerland. In this analysis I will make my calculation based on the U.S. listed stock, as it is more comparable to Turtle Beach and Corsair, as it will be in U.S. dollars.
Logitech was founded in 1981 in Switzerland. They describe themselves as a world leader in designing, manufacturing, and marketing products that help connect people to digital and cloud experiences. In short it means that they are operating in PC peripherals, and are known for products such as webcams, mice, and keyboards. They operate in five different business segments: Creativity & Productivity, Gaming, Video Collaboration, Music and Smart Home. It means that Logitech is more than just a gaming company. I believe that Logitech's many years in the business, and their high market shares that continues to grow demonstrates that Logitech has a brand moat.
Their CEO is Bracken Darrell. He joined Logitech in 2012 as president and became the CEO in 2013. He has vast experience through different positions in large companies such as Pepsico, General Electric, Procter & Gamble and Whirlpool. He has B.A. in English from Hendrix College in Arkansas, and an M.B.A. from Harvard Business School. Besides being the CEO of Logitech, he serves at the board of directors of Life Biosciences and on the U.S. advisory board of Harvard Business School. Since he became the CEO of Logitech, the company has more than doubled their net sales, and profits are up more than 13x. He has been named Swiss CEO of the year three times within the last four years. He has been credited from turning Logitech from being a company that was mostly known for cheap computer mice into an award-winning design company. He is known for being "a people's CEO" that spends time with his employees and listens to their point of view. He has a high CEO score on comparably, where he earns a top 5 % score compared to CEOs in similar sized companies. Once he had been a CEO at Logitech for five years, he decided to do an exercise where he fired himself and assessed whether he would hire himself. It wasn't a gimmick but an exercise to determine if he was the right man for the job. Luckily for Logitech, he concluded that he was. I feel very comfortable on Bracken Darrell being the right person to drive Logitech's growth moving forward.
I believe that Logitech has a brand moat. I feel very comfortable in the management being able to sustain growth many years moving forward. Now let us investigate the big five numbers to see if Logitech does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. Besides that, we would like to see the numbers increasing from benchmark to benchmark. Logitech fulfills all the requirements. A great ROIC that is growing from benchmark to benchmark. You don't see many companies delivering numbers like these. I'm very intrigued when a company deliver a ROIC like this.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. All right, the number is slightly below 10 % in the oldest benchmark. It hardly means anything. Instead, we see the same pattern as in the ROIC. A sales growth rate above 10 % and growing from benchmark to benchmark.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again Logitech delivers fantastic numbers all over. Way above the required 10 % in each benchmark, and like we are accustomed to now, the numbers are increasing from benchmark to benchmark.
The Equity Growth Rate is also known as the most important of the four growth rates. Again, Logitech delivers in all benchmarks except for the oldest, where they are slightly below the 10 % requirement. Else it is the same story as in the other numbers we have looked at. Above 10 % in each benchmark and growing from benchmark to benchmark.
Finally, we investigate the Cash Growth Rates. Once again, we see the same pattern. Well above the 10 % requirement in all benchmarks and growing from benchmark to benchmark. I guess we are accustomed to that by now, as it is what we have seen in all the numbers we have looked at. Very impressing.
To shortly summarize the five numbers from Logitech. I don't think I have ever seen a company before that is growing from benchmark to benchmark in all the numbers. It is very encouraging, and we only have two numbers that are slightly below the 10 % requirement. However, last year was a record year for Logitech, which is also obvious if you look the one-year benchmark in all the numbers. Hence, I wouldn't put too much important in the one-year benchmark, but it is worth noting that it will be difficult for Logitech to continue to deliver numbers like those.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. However, we were spared of doing the simple calculation, as Logitech has no debt.
Based on the moat and the numbers, I believe that Logitech is a very interesting company but like with all other investments, there are some risks. Short-term there are two things that may end up impeding their revenue and that is freight prices and semiconductor shortages. In their latest conference call, they announced that especially these issues will hurt margins, and unfortunately, these issues are expected to continue into next fiscal year. One of them is that they operate in a very competitive market. If competitors choose to reduce their prices, it could hurt Logitech, either their profit if they lower prices themselves or the brand if they lower the prices, as it removes some of the exclusivity about the brand. A slowdown in the gaming accessories sector growth. The gaming accessories sector has been growing at a fast pace during the pandemic, and if that growth slows down, as Covid restrictions around the world are removed, it could slow down this sector.
Despite the risks, there are some good reasons why Logitech could be an interesting investment. Especially three of their segments should drive growth moving forward. Video collaboration. It is expected that there are around 100 million meeting rooms and classrooms around the world, and less than 10 % of these are video enabled. Logitech's video collaboration segment tripled during the pandemic and has had a 56 % CAGR, and with still lot of the market not being fulfilled, there are a lot of potential growth for Logitech, where they are growing their market share every year, and now has a 31 % market share. Creativity & Productivity. They are growing sales, in a growing market, where they are growing their share. Net sales have grown at a 27 % CAGR over the last three years, and Logitech's market share has grown from 46 % in 2020 to 50 % in 2022. And according to the management this growth will continue post-pandemic, as the pandemic just kickstarted a trend that we already had with people working from home. Gaming. The number of worldwide gamers is expected to grow from by approximately 100 million a year until 2023. Cloud gaming is expected to grow by 35 % CAGR until 2024, and as cloud gaming doesn't necessarily need custom made high-end PC's, the gamers are probably more inclined to spend more money on peripherals. Their PC peripherals will also benefit from more streamers and creators.
All right, we have gone through the numbers, potential and risks regarding Logitech, and now it is time for us to calculate a price for Logitech. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 4 (which is lower than the current one of 5,54 because last year will be hard to replicate). I chose an Estimated future EPS growth rate of 9 (expected growth is between 9 and 10 %), Estimated future PE 19 (double the growth rate, as the highest historical P/E is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $46,56, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Logitech at price of $23,28 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 1.458,64. The Capital Expenditures was 76,19. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 53,333 in our further calculations. The Tax Provision was 200,86. We have 166,23 outstanding shares. Hence, the calculation will be like this: (1.458,64 - 53,333 + 200,86) / 166,23 x 10 = $96,62 in TEN CAP price. However, last year has been exceptionally good. If I do the calculations based on 2020 and 2019 (Logitech's fiscal years end in March), I get Ten CAP prices at 16,36 in 2020 and 17,66 in 2019.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". The free cash flow per share last year was 5,10 but I don't believe that to be sustainable. Hence, I have decided to cut it to 4. With the Free Cash Flow Per Share at 4 and a growth rate of 9 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $49,19. If you do the calculations with 5.10 the numbers would be $62,72.
I believe that Logitech is very interesting company because of their brand moat, their great management and the fantastic historical numbers that show that Logitech has performed very well in the past. Today's price is still a bit steep for me despite it has dropped significantly from their all-time high. If I could get it below the PAY BACK Price of $49,19, as it traded for before the pandemic, I would open a position. Until then I will probably look else where.
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