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Zebra Technologies (ZBRA) has seen a significant pullback as of recent in its share price, trading near the 52-week lows, as this comes after logistics markets (which are an important end market for the company) continue to be on fire.
In August 2020, I described shares of Zebra to be a secular growth story with Covid-19 protection as that thesis played out, with shares up more than 50% ever since, despite a recent nearly 30% pullback. Right here, valuations still look somewhat reasonable given the potential.
Summer Of 2020
In August 2020, Zebra was already recovering from an initial decline in sales in response to the pandemic, as it furthermore was investing more into software. The pandemic conditions were near perfect for e-commerce solutions as well, providing another growth driver behind the demand for its products and solutions, all while the company has solid management and excellent dealmaking track record.
Zebra is what it calls an EAI (Enterprise Asset Intelligence) solutions provider, with products and solutions allowing for automatic identification and data capturing. Actual products to think of include barcode and RFID scanners, special printers and various complementary cloud- and subscription models which are used in retail, ecommerce, logistics, warehousing, and alike. The company is more and more looking to integrate all these products as well, including robots, among others.
The company grew sales from a billion a decade ago to $4.5 billion in the summer of 2020, in large part driven by the purchase of Motorola Solutions’s Enterprise business, while margins were quite stable around 15%. The stock traded at $20 in 2008, rose to $120 in 2015 upon the Motorola purchase, fell back to $50 a year later and rose to a fresh high at $280 in August.
For the year 2019, Zebra posted a 6% increase in sales to $4.5 billion as net earnings of $544 million rose 29% to $10 per share (GAAP basis), with adjusted earnings per share (mostly adjusted for amortization charges) running at $13 per share. I pegged realistic earnings around $12 per share, adjusting for roughly a dollar in stock-based compensation expenses, while net debt of $1.25 billion was manageable, at 1.3 times EBITDA.
The company posted flattish first quarter results and second quarter sales fell 13%, during the pandemic struck quarter, with the company guiding for just a 5% fall in third quarter sales as headwinds in key sectors were offset by growth in others (read ecommerce). The company furthermore paid $575 million to acquire $66 million in sales from Reflexis Systems, an intelligence workforce management provider, which looks steep at 9 times sales, but this was a software play, while Zebra is a mixture of software and hardware.
With shares trading at 23 times my estimated normalized profit rate of $12 per share, valuations were full, but leverage was manageable, the track record was good and there was a strong secular growth story, making me a buyer on dips. When shares hit the $250 mark a month later, I bought small, looking to average down, but the story ended with just a small position.
2021 – Rocketing On
Since buying a small stake in September 2020, shares rallied further as they ended the year around the $400 mark, traded as high as the low $600s in December 2021, before now having seen a substantial retracement to $440.
Early in 2021 it was apparent that the company has been able to keep sales flat at $4.5 billion in 2020, as adjusted earnings per share were largely flattish at $12.80 per share. This was however a year of two tales as the first three quarters were softer, but the fourth quarter was very strong with sales up 10% year-over-year and adjusted earnings per share up nearly a dollar in the final quarter alone!
The company furthermore issued a comforting outlook for 2021, with sales seen up 10-14% and EBITDA margins seen at 21-22%, setting the company up for a big profit explosion. Following a very strong first quarter, the company hiked the full year sales growth guidance to 20%, with the midpoint of the EBITDA guidance hiked by another percent as well.
In July, Zebra announced the $290 million purchase of Fetch Robotics, a producer of autonomous mobile robots, used in fulfillment and distribution centers. With sales reported at just $10 million per year, it is needless to say that valuations are very demanding, as this is a forward-looking deal, but the operating momentum of Zebra easily allows for such deals, from a financial and credibility point of view. Following a very strong second quarter results, the full year sales guidance was even hiked to 24%.
A Reset And Now?
Following a few spectacular quarters in 2021, revenue growth slowed down to 12% in the final quarter of 2021, albeit that full year growth still came in at 26%. Full year sales rose to $5.6 billion as EBITDA margins improved to 23%. GAAP earnings rose 66% to $15.52 per share as adjusted earnings were still up 44% to $18.45 per share, with realistic earnings likely trending around $17 per share.
Net debt stood at $634 million for the year, a relatively modest amount given the $1.17 billion in adjusted EBITDA number posted for the year. This is a modest leverage situation, even as the company spent nearly half a billion on dealmaking in 2021, mostly on the Fetch acquisition, but furthermore on the purchase of Adaptive Vision and antuit.ai.
With shares down from $600 to $440 per share, the valuations (based on realistic earnings of $17 per share) have fallen from roughly 35 times earnings to 25 time earnings. Of course this is all based on the 2021 performance, as the company guides for relatively modest sales growth in 2022, with full year sales seen up 5% to the midpoint of the guided range. EBITDA margins are seen at 23-24%, despite an estimated $150 million premium freight expense.
With EBITDA margins posted at 23.0% in 2021, we likely see high single digit earnings growth, which realistically works down to realistic earnings around $18.50 per share. Even if this is achieved, forward multiples still come in at 23-24 times earnings.
Final Thoughts
A forward 23 times multiple is certainly not dirt cheap, given that many growth stocks have sold off as of recent. There are a few benefits, and this includes a very strong balance sheet, willingness to invest (directly, or indirectly) in innovation, long-term secular headwinds, as a current market valuation is high but still is manageable for a strategic buyer, looking to bolster its organic growth profile.
Given all of this I see appeal definitely emerging, although I am waiting for a further pullback towards the $400 mark to enter to my current very modest position here.
