This Spring saw harsh criticism and falling share prices for "old tech" giants Microsoft (MSFT) and Cisco (CSCO), but their share prices have recently started to turn around. The market has overreacted to news about expected earnings from Logitech International, SA (LOGI), and I think this stock will be next in line to benefit from the trend that is starting to buoy MSFT and CSCO.
This past April, Logitech lowered its profit guidance by about 20%, and this news sent the price of the company's stock falling from $18 per share to below $14.50 (a drop of almost twenty percent) practically overnight. Since that time, the stock price has continued to fall, trading at a price of approximately $10.50 per share, over forty percent lower than the share price on March 31.
At this market capitalization, you could theoretically buy the whole company for a price of about 1.9 billion dollars. In my opinion, this low price ignores the strength of Logitech's balance sheet. As of March 31, Logitech had approximately one year's worth of cash on its books and no long-term debt. Moreover, Logitech remains debt-free even after its 400 million dollars acquisition of video conferencing company LifeSize in 2009. By avoiding debt and making timely acquisitions, Logitech's board and management appear to be good allocators of capital.
Logitech is in a difficult business that doesn't naturally lend itself to a "moat" or competitive advantage, but I don't view this as an insurmountable obstacle to value. Logitech makes computer peripherals and equipment, and the problem with building a competitive advantage in this business is that technology and cutomer tastes change frequently. Normally, I would avoid buying stock in a company that doesn't have a built-in margin of safety in its business model, but at this low share price and in light of my impression of the company's skill at managing capital, I'm willing to make an exception. In this case, Logitech has already successfully navigated the shifting currents of taste for years, it has an extremely broad product line and a diverse customer base, it seems like the company is able to enter new product lines skillfully, and it has maintained a strong financial position (plenty of cash, no debt) that will allow it to execute business plans and conduct R&D planfully without too much short-term performance pressure.
Logitech's depressed price may also be a symptom of the same disease that has effected what many refer to as "old tech" stocks such as Microsoft and Cisco. This Spring saw vicious criticism of CEOs Steve Ballmer and John Chambers as share prices fell, but stock pickers such as Donald Yacktman and industry leaders such as Marc Andreessen saw real value there. Microsoft and Cisco both have large amounts of cash on their balance sheets, adding to the value in these stocks. In Logitech's case, I think the Lifesize acquisition compares favorably with holding cash; that is to say, had they not acquired the company, they would be in a similarly strong cash position, and the acquisition looks like it was a good use of cash.
Recently, Microsoft and Cisco's stock prices have experienced upturns. I think Logitech's stock has a similar story, and it is only a matter of time before the market recognizes similar qualities.