Logitech: Solid But Overpriced

Oct.31.06 | About: Logitech International (LOGI)

Logitech (NASDAQ:LOGI) is a well-managed Swiss company that competes in the computer peripherals space, and therein lies the issue for me: competition.

Periodically the company reports excellent results -- as they did this month. Then the share price goes over the top. Today the RSI-7 for the Daily-Weekly-Monthly is 80.0, 83.7 and 74.1 respectively. The share price popped over 10-pct on the 20th after reporting an excellent quarter.

At $26.50/share for the ADRs, the shares are probably anywhere from 25-pct ($21) to 40 pct ($19) overbought.

Following a market correction, these shares would look very attractive if the Merrill Lynch earnings projections turn out to be accurate: 2005a (+15.8pct) @ $0.84, 2006a (+18.4pct) @ $1.00, 2007e (+18.2pct) @ $1.18, 2008e (+16.8pct) @ $1.38, and 2009e (+13.7pct) @ $1.57.

In a nutshell, LOGI trades at a discount to the P/E of its peer group, but has a projected earnings growth that is superior. The balance sheet strength and operating margins and Return on Equity (2007e @ 29.5pct) are solid, so the company is clearly a better-quality one.

However there is a high 1.89 beta, which means that the share prices tend to overshoot the average market swings, and there is a lot of competition in the space (webcams, mice, trackballs, keyboards, interactive gaming controllers, etc), so there is always going to be stories of the better mousetrap (smiley goes here). That would make me nervous.

In situations like this, I look to severe market pullbacks before venturing into the shares. So let's say I set a $19.50 buying point and set a 12-month Price Target of $29.50 (say 25x 1.18e for 2007) -- then I’d be setting a Total Return (NYSE:TR) objective of +51.3-pct, which is acceptable.

But at the current price ($26.50) and RSI-7 (averaging 80 for the M-W-D data series), I’m not the least bit interested. I say: let the current owners accept the risk; the market will come to me. If it doesn’t, there are options.

For those who wish to study LOGI and its peers further, here is something to think about:

One of the peer group options is SanDisk (SNDK), which is a Cara 100 company. SNDK is on the slide right now, and the price is starting to come to me… not completely, but starting.

In the case of LOGI, that process hasn’t even started.

In the three reports on Logitech that I have uploaded for you, the Street.com report has an effective peer review, as follows:



Download Oct 20 Merrill Lynch research on LOGI (.pdf)
Download Oct 28 Standard & Poor’s research on LOGI (.pdf)
Download Oct 6 Street.com research on LOGI (.pdf)