The stock market has high expectations for companies this year. In some cases, even great results aren’t good enough to satisfy Wall Street’s insatiable demand for growth, cautions Jim Pearce, chief investment strategist of Investing Daily'sPersonal Finance.
The management team at Logitech International (LOGI) learned that lesson the hard way when LOGI fell more than 10% after the company released fiscal 2022 Q1 results on July 26 that included a 58% increase in sales and a doubling of operating profits compared to the same period last year.
This was not a case of failing to live up to expectations. For the quarter, Logitech reported adjusted earnings per share (EPS) of $1.22 versus a consensus estimate of $0.96. The culprit was the guidance provided by the company for “flat sales growth in constant currency, plus or minus five percent,” for fiscal year 2022.
Normally, flat sales growth would be a good reason to punish a stock. But in this case, the comparison is to a very strong period of sales growth last year fueled by the coronavirus pandemic.
With so many people stuck at home, demand for Logitech’s PC peripheral hardware, gaming consoles, and videoconferencing equipment skyrocketed in 2021.
My interpretation of Logitech’s tepid guidance is that it either does not yet know, or does not want to reveal, exactly what is going to do with the huge cash reserves it has built up during the past year. As of June 30, Logitech’s cash balance was $1.5 billion. That is $700 million more than it was a year earlier, even after spending $55 million on share repurchase during the quarter.
That is not to say that the company is not doing anything with its money. During the quarter, Logitech nearly doubled its spending on Sales & Marketing and increased its Research & Development budget by 38%. The firm also prepaid its full-year estimated income tax liability instead of making a quarterly payment.
It appears that the company is clearing the decks so it knows just how much cash it has to work with over the remainder of the year. Surely, some of that money will go towards its annual dividend payment (usually paid in September) and a chunk of it will probably be used to bolster its share repurchase plan, but neither of those actions will spur growth.
I don’t pretend to know what Logitech is going to do next, but I expect the company to acquire a business that will directly benefit from the explosive growth in 5G spending over the remainder of this decade.
There will be so many opportunities in the IoT (Internet of Things) hardware market that Logitech should be able to find a product manufacturer it can acquire at a reasonable price.
There is no telling when such an announcement might be made that suddenly drives LOGI higher, so I am changing Logitech from a ‘hold’ to a ‘buy’ with a limit price of $115.
