Logitech International SA (NASDAQ: LOGI) shares traded higher in Tuesday's session, by as much as 3.5%, amid the company reporting its first quarter 2023 earnings results on Monday after the market closed. Results showed concerning contractions across Logitech financials.
In the press release items, CEO Bracken Darrell and CFO Charles Boynton point investor attention toward strong and near-record results in other areas, which may help the Logitech stock price.
Analyst Sentiment Amid Slowdowns
Logitech recorded a total revenue decline of 22%, taking the company's top line below $1 billion for the first time in a decade. Management attributes this fall to lower enterprise and consumer spending. Marketing and selling costs also declined significantly. However, research and development costs rose 1%, which reflects the company's commitment to delivering new and improved products despite cyclical slowdowns in the economy.
Due to declining revenue and cost-cutting initiatives to protect profitability, operating margins suffered. The company's 2022 operating margins stood at 10.5%. Most recently, margins fell to 4%, offset by a non-recurring restructuring charge of $18.1 million. Adjusting operating income for this non-core charge would boost margins to 6.2%. Investors felt the bulk frustration of these contractions in the bottom-line earnings per share, which declined by 60% year-on-year to a quarterly figure of 26 cents.
Noticing the slowdown in sales amid decreased consumer and enterprise spending for personal electronics, management has taken the conservative route to guide investors. Pointing to management's outlook of an 18% to 22% revenue decline for 2022, Logitech analyst ratings see some downside from current prices and keep a "hold" rating. Some investors, as seen in the price action despite a market decline, believe the company still holds unlocked value premiums in other areas of the financials.
What Made the Price Rally? What Could Keep it There?
On a free cash flow basis, Logitech reported $193 million in the first quarter of 2022, up by 161% from a year earlier. This level of free cash flow nearly matches the 2022 fiscal year free cash flow figure of $209 million. Despite slowdowns in the top line, some hidden momentum will likely run into the next quarter. In addition, these elevated levels of free cash flow allowed the company to start the year with no debt.
The benefits of these near-record levels of free cash flows were not only present in the company's debt levels but also in the increased ownership by shareholders as a result of Logitech management repurchasing seven million shares from the open market. Achieving these profitable levels required extraordinary discipline in managing current inventory levels, a recent pressure point for many industries. Logitech reduced inventories to 19.2% in the first quarter, a reduction from 2022's 23.1%, where further discounts and write-downs occurred.
Logitech's dividend shows a healthy 20% payout ratio. Currently, Logitech is paying a 2.07% dividend yield, which is the highest in more than three years, suggesting that the stock may not be as well valued as analysts suggest.
Today, Logitech's book value is trading at a 4.2x multiple, severely discounting historical valuation sentiment by the marketplace and validating that a high dividend yield could give way to some undervaluation suspicion.
