ZBRA - Zebra Technologies: Time To Prove Itself

Summary

• Zebra has been hit hard by component shortages, a strong dollar and softer order growth by its customers.
• Amidst sales coming to a standstill in 2022, margins have held up quite well.
• Valuations appear reasonable given the long-term positioning, as uncertainty will likely prevail for a while.

In April of last year I concluded in this premium article that I was picking up some shares in Zebra Technologies ( ZBRA ) on the back of its long term secular growth positioning, while valuations were rapidly becoming more compelling.

EAI - Solutions

Zebra is what itself calls an EAI (Enterprise Asset Intelligence) solution provider whose products and services allow for the automatic identification and capturing of data. These products, and related services, include RFID scanners, printers and related products, often used within e-commerce, warehousing and logistics.

The company made a transformative deal in 2015 when it acquired Motorola Solutions Enterprise, a deal which created a (leverage) overhang for quite a while. Ever since, the company grew sales to $4.5 billion in 2019 on which it posted earnings of $544 million. The resulting $10 earnings per share power was awarded a $250 valuation at the time, of course ahead of the boom induced by the pandemic.

That boom did not reveal itself immediately after Zebra was hurt at the outset of the pandemic as well. In the end, the company posted flattish sales around $4.5 billion for the year 2020, albeit that adjusted earnings rose to $12.80 per share. What followed was a very strong 2021, a year in which sales rose by 26% to $5.6 billion. GAAP earning rose to $15.50 per share, as adjusted earnings came in around $18.50 per share, with realistic earnings likely seen at the middle (adjust for stock-based compensation expenses). Note that part of the growth was achieved on an inorganic basis as well, as Zebra has announced a few deals during the pandemic period.

The extrapolation of the boom times induced by the pandemic, both in terms of sales growth and margins gains, resulted in higher expectations by year end 2021, a time at which shares peaked above $600 per share. In fact, in almost ideal situations, the company has seen a huge increase in the valuation for its earnings power. A retreat of the pandemic and tougher comparables made that 2022 was set to become a tougher year, with the company guiding for 2022 sales to grow by just 5%, amidst flattish margins (in part due to higher freight costs and the issue of component availability).

With shares down to $375 in April of last year, I saw appeal in increasing a bit. The 54 million shares awarded the company a $20 billion equity valuation at the time, as valuations had fallen to about 20 times realistic forward earnings. Moreover, the company announced an interesting $875 million deal for Matrox Imaging, setting the company up for 2022 sales to come in around $6 billion. Net debt would jump to $1.5 billion, yet a $1.2 billion EBITA number in 2021 made that leverage was still very manageable at just over 1 times.

What Happened?

Obviously the initial optimism around $375 per share was a bit too preliminary as a continued pullback in e-commerce made that demand for Zebra´s products has come under further pressure as well. This resulted in shares falling to just $230 this autumn, now having rebounded to $315 at the moment of writing, as the purchase in April obviously was a bit too early.

The slowdown in the results was already seen in the first quarter. In May of last year, Zebra announced a mere 6% increase in quarterly sales to $1.43 billion, with margin pressure resulting in a 16% decrease in adjusted earnings to $4.01 per share. The company still saw full year sales around 5%, with EBITDA margins seen between 22% and 23%, still quite a bit higher than first quarter margins of 20%. With shares down to the $300s, the company announced a billion share buyback program in the wake of the results.

In August, Zebra posted second quarter results with sales up nearly 7% to $1.47 billion, as growth accelerated slightly despite a stronger dollar. Non-GAAP earnings actually rose a percent to $4.61 per share. The company continued to guide for 5% sales growth, with deals adding to reported sales growth, offset by the impact of a stronger dollar. The currency headwinds made that EBITDA margin are seen at the lower end of the 22% range.

The company posted very soft third quarter results, a quarter in which revenues fell 4% to $1.38 billion, albeit that adjusted earnings were only down 9% to $4.12 per share. Topline sales results were still impacted by a strong dollar and component shortages, but specifically by projects being deferred as well. Dealmaking, lower profitability and share buybacks made that net debt inched up to $2.1 billion.

And Now?

Zebra has been taking on some debt, in part to pursue buybacks ($655 million in the first nine months of 2022) which have reduced the share count to 52 million shares. Net debt of just over $2 billion is still fairly manageable with EBITDA trending around $1.2 billion, comfortably below 2 times.

While sales are flattish in 2022 and trends are tough, the company has been able to maintain margins at a decent level, with adjusted earnings seen around $17 per share in 2022. This however excludes for about two dollar per share in stock-based compensation expense, and adjusted for that realistic earnings likely trend in around $15 per share. The lower earnings power makes that earnings multiples are pretty flat at 21 times, that is flat compared to the multiple projected in April last year, after shares have come to live recently.

Amidst all this I remain upbeat in the long run, but I see no reason to alter my long position, certainly not after a momentum run higher in recent months, as I became a bit too bullish too early last year.

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