Logitech: This Apple Derivative Play Looks Set To Soar

Jul.29.14 | About: Logitech International (LOGI)


Logitech released terrific first-quarter results and shares shot up 14%.

Logitech has remarkably improved its performance due to focus on strong execution and operational efficiency.

The company should benefit from a new iPad release.

Logitech's focus on product innovation is delivering strong results.

Logitech has got sound fundamentals and solid earnings growth potential.

Logitech (NASDAQ:LOGI) shares soared more than 14% after the peripheral manufacturer turned in solid first-quarter results and raised its profitability outlook for the current fiscal year. Logitech beat earnings estimates handsomely, and looks set to improve further as Apple (NASDAQ:AAPL) is getting ready to refresh its product line-up.

Delivering solid improvements

Logitech's focus on reducing its operating expenses, and investing in products with high growth potential seems to be delivering results. Logitech credits its higher profitability to reduced operating expenses. According to management:

"We are very pleased by the significant progress we made in improving operational execution and reducing our cost structure during fiscal year 2014, which has made us nimbler and more profitable."

As a result of its cost cutting initiatives, its gross margin improved to 38.1% in the quarter from 35.2% in the prior-year period. Hence, the company is well on track to improve its performance going forward. In addition, Logitech is benefiting from investments in new products. The computer hardware maker won 121 design awards, the highest in its history, in the fourth quarter last year. This reflects the strength of its products. The company believes that the solid execution of its restructuring moves will allow it to generate more cash that can be invested to innovate its technology further.

End-markets driving growth

Logitech is experiencing strong momentum in PC gaming, and it expects the trend to continue going forward. The company has received positive responses for its recently launched G502 Proteus Core tunable gaming mouse, and management is excited about its potential to drive share gains going forward. Moreover, Logitech has many other innovative new PC gaming products in its pipeline, which will hit the market in the coming months.

Similarly, as the tablet market grows, its accessories, such as tablet keyboards, will benefit from this momentum. According to management

"We'll continue to leverage our keyboard expertise as a competitive advantage by developing tablet keyboard price to drive increased attached rates for both the Apple and Android platforms."

In addition, the company is also gaining market share in the large and growing tablet case market. With the recent addition of three newest protected cases for the iPad, it sees solid potential.

Apple is on track to release a new iPad this year, and this will fuel its revenue higher going forward. Apple is already seeing solid traction in iPad sales in emerging markets such as China. As reported by TechCrunch:

"Apple's earnings are out, and there's a narrative contained therein of the emerging importance of China and BRIC (Brazil, Russia, India and China) countries in general - the company revealed to the FT that iPhone sales are up 55 percent year over year in the BRIC nations, and Chinese iPhone sales are up 48 percent, with the iPad sales in that country rising 51 percent year over year despite falling slightly globally.

The iPad sales were also up over 50 percent in the Middle East, India and China, and saw a lot of new sales to education and health customers."

The increasing sales of the Apple tablet in new markets will expand Logitech's addressable market, because its share of tablet keyboards designed for the iPad is more than 50%. Moreover, the launch of new covers should also act as a catalyst going forward.

More catalysts

Logitech also makes mobile speakers and is excited with the solid performance of its flagship product, the UE BOOM. This was launched during the first quarter of last year in only a few markets, and its success encouraged the company to increase distribution into more markets. In fact, this became the primary factor in nearly tripling its sales of mobile speakers during the year. This is a good sign for Logitech investors, as its product innovations are being received well by consumers.

Logitech has also expanded its distribution network, positioning itself for continued growth in fiscal 2015. Going forward, it aims to maximize its profit in PC products, as it had been doing in the previous year. In addition, Logitech plans to invest a significant amount in its growth category, which will help the company achieve its long-term targets. Management plans to use its savings to invest small amounts in markets with attractive long-term growth where it can create a strong market position.

Valuation and conclusion

On top of its product development moves, Logitech also carries an attractive valuation. Its trailing P/E ratio is 33, while the forward P/E is 15. This indicates solid earnings growth in the future. Moreover, the company doesn't have any debt, and its cash position is strong at almost $470 million. Looking ahead, Logitech's bottom line is expected to improve almost 27% next year, which suggests that the company's momentum should continue.

All in all, Logitech is progressing on the right path. Its investments in new products and the growing adoption of Apple's iPad in the emerging markets should continue acting as long-term catalysts, making Logitech a solid buy for the long run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.