2023-05-08 03:32:41 ET
Summary
- Ubiquiti has seen a softer quarter and sees a continued build-up in inventories.
- This is somewhat disappointing, but as often has been the case, shares react with great volatility to the results.
- While not dirt cheap, I am turning upbeat again on the shares here.
In February of last year, I believed that it was time to connect again with shares of Ubiquiti ( UI ) . The company was lapsing tough comparables, while being plagued by supply chain issues, resulting on pressure on the shares for the right reasons. That said, some of the pullback looked like an overreaction, resulting in an opportunity to get involved.
Some Perspective
Ubiquiti is a bit of a strange animal. The company is laser focused on operational excellence, a lean structure, innovation and few dollars spent on marketing, under the belief that superior products sell themselves. This has proven to be a reality, as the strong margins and retained earnings allowed the company to grow rapidly on the back of the product superiority.
The company has a broken book year which makes that it posted its fiscal 2020 results in June of that year, as I pick up coverage here to get an idea about the recent trends. Full year sales were up 10% to $1.3 billion with of course some weakness seen towards the end of the year amidst the outbreak of the pandemic. The company earned about $6 per share, at a time when shares traded at $180.
The pandemic fueled demand for Wi-Fi solutions, seen in a rapid acceleration in the 2021 results. Full year sales rose an astonishing 48% to $1.9 billion as earnings rose to $9.78 per share, all while net debt has been cut in half to around a quarter of a billion. These strong results made that shares peaked around $400 in the spring of 2021, although shares ended the year around the $300 mark.
This came as the growth came to a standstill amidst tough comparables and supply chain issues, in fact in some quarters the company posted year-over-year sales and earnings declines. Earnings power has fallen from a run rate around $10 per share to a run rate around $7 per share. Shares fell to $232 per share as the company reported a 10% fall in second quarter sales for 2022, but I was still quite upbeat.
With earnings down to a run rate of $7 per share, the 33 times multiple was not cheap, but looked cheap enough (remember that this was ahead of the big increase in interest rates) making me a renewed owner at the time.
What Happened?
Since I initiated a position at $230 in March last year, shares quickly rebounded to the $300 mark over the summer, and even rose to $350 in the fall. The company posted a huge fall in third quarter sales in 2022, but fourth quarter results showed some (sequential) improvements. This made that full year sales fell from $1.9 billion to $1.7 billion, as earnings of $6.13 per share were actually trending below my $7 per share estimate.
With shares trading at $325 at the time of these results being released, I was happy with a 40% gain in the time frame of just half a year, all while the results were softer than I estimated to be. On the back of that I sold out approximately 80% of my position, still holding a small position, mostly acting as a watch function in the portfolio.
In November the company posted first quarter sales of $498 million, up 6% year-over-year although that GAAP earnings of $1.54 per share were down meaningful year-over-year. In February, second quarter sales of $494 million were flat on a sequential basis, but given the soft quarter this time last year, revenues were up 14% on the year. Moreover, the company improved its profitability, with earnings reported at $1.86 per share.
In May the company released a very soft third quarter earnings report. Revenues rose 28% on an annual basis but fell to $458 million in dollar terms, marking sequential revenue declines as well. The company continues to be pretty profitable, posting operating profits of $133 million, with earnings reported at $1.63 per share, with earnings so far this year totaling $5.03 per share after three quarters.
Noteworthy is that net debt increased to the $900 million mark, mostly because inventories of about three quarters of a billion have tripled since the start of the fiscal year 2023. Inventories rose by more than a hundred million on a sequential basis, which is concerning as many companies indicate that the worst supply chain issues seem to be a thing of the past, but that is not the case for Ubiquiti here, obviously.
And Now?
The reality is that this sounds a bit like a deja vu to me here. After taking shares for a nice 40% ride last year (at least the vast majority of my position) I now am getting more upbeat again. With earnings power trending at around $7 per share multiples are not cheap, but the long term performance of the company and stock is great.
On the negative side that leverage is increasing a bit, but this is largely driven by working capital changes, as earnings power of the business remains very sound, not creating major concerns on this front.
Hence, I am reloading again on the stock, anticipating a re-rating during the year. The great insider ownership, limited float, and gradual buybacks make me upbeat on the shares here, hoping and perhaps anticipating a recurrence of the 2022 trade.
For further details see:
Ubiquiti: Re-Connecting Again