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Saj Karsan, Barel Karsan (300 clicks)
Long only, deep value, value, contrarian
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Peripheral device maker Logitech International (LOGI) now trades below its March 2009 lows, as it has now breached price levels not seen since 2003. Though the company has generated net income in excess of $500 million over the last four years and has a net cash balance of $520 million, it trades for just $1.3 billion.

The kinds of devices Logitech makes (mice, keyboards, webcams, etc) are generally considered commodity-like products, in that it is very difficult to differentiate from competitors. As a result, one may expect a fiercely competitive price-driven industry with unattractive returns.

But in many of its product categories, Logitech is a leader, which may confer a scale advantage to this company. Marketing and R&D expenses together account for almost 25% of revenues, which allows Logitech a cost advantage where it can spread these expenses across larger volumes.

Logitech's historical financials support this notion, as from 2002 to 2008 Logitech's ROE never fell below 25%, despite a very conservative capital structure (i.e. lots of cash relative to debt). Over the same period, its operating margin never fell below 10%.

But in 2008, a management change at the top took place, and the company hasn't been the same since. ROE and margins have fallen to levels one would normally expect in a highly competitive industry, suggesting perhaps it was management efficiency, and not a competitive advantage, that propelled the company to its dizzying returns pre-2009.

Fortunately for shareholders, at the current price they do not have to assume Logitech has a competitive advantage. If the company is able to generate even normal returns on capital (which it is already doing), shareholders should make out well.

The company's board has shown a propensity to buy back shares when they are cheap, and it is therefore likely that the company is currently buying back shares. One risk, however, is that the company blows its cash balance and/or future cash flow on a poor acquisition. For example, the company spent $380 million in 2009 to buy a company at 3x revenue that is still unprofitable.

The company also faces some challenges related to its product portfolio, as desktop PC growth slows (particularly in mature markets), resulting in lower demand for some of Logitech's traditional peripheral devices (particularly webcams). At the same time, however, Logitech has an opportunity to participate in the peripheral device category for fast-growing tablets and smartphones (e.g. with products such as fold-out keyboards for tablets).

At its current valuation, Logitech looks cheap. But if the company's new management (announced in mid-March of this year) is able to undo some of the damage done from 2008-2011, Logitech may turn out to be extremely cheap at its current level.

Source: Logitech Looks Cheap