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Logitech (LOGI): A Mouse That Could Roar

 January 10, 2013 02:29 PM

(By Kevin Donovan) We recently looked for stocks with double-digit earnings growth expectations at bargain prices and were suddenly back in the 1990s when, with itty-bitty screwdriver in hand, we installed 40 megs of RAM in our Compaq desktop so number-one son could play games with a Logitech joystick.

But you can't eat memories.  Investment decisions are all about confidence or lack thereof in the future, which is why we think shares of computer peripheral maker Logitech (it made its name making the lowly mouse) could double as confidence in that future grows.  

Efficient markets theory holds that all available information is contained in the stock price, which means cheap stocks are cheap for a reason.  If estimated growth is cheap, the reason, of course, is lack of confidence in that estimate.  We think Logitech, valued at a PE to earnings growth multiple of about 1.00 or under depending on whom you ask, reached a bottom late in 2012 and should continue to climb if the global economy continues to recover.

[Related -Logitech Q3 Preview: PC Weakness Should Weigh On Earnings]

The problem with valuing this stock is determining long-range earnings growth.  Analysts expect fiscal 2014 (fiscal year ends in March) earnings growth of 34% or so, with five-year estimates ranging from about 14% to 38% per annum.  With a trailing 12-months PE of about 14.5, PEG estimates vary widely.  Taking the midpoint of the earnings-growth estimate range yields a PEG of just 0.51. We think this level is compelling.

As a computer peripheral maker, Logitech is obviously dependent on the market for computers, which blows with the prevailing winds of macroeconomic health.  Our outlook is for increasing vigor in the months ahead, underscored by China's latest trade statistics showing a surprising jump in exports.

[Related -Another Big Day With Strong Gains And Positive Technicals]

The new product line-up  is also important.  As the gadgets have changed, so has Logitech. Its latest cool accessory is the Logitech Bluetooth Easy-Switch Keyboard features Logitech Easy-Switch technology.  It allows users to go from typing an e-mail on a Mac to taking notes on an iPad to replying to a text on an iPhone, by pressing a button. In addition, the Logitech Rechargeable Trackpad provides a full set of Mac OS multi-touch gestures on a smooth glass surface.

To be sure, Logitech was downbeat in its fiscal second-quarter earnings release, citing slower PC sales as a big headwind.  But this could be a case of under-promising and over-delivering.  It's also worth noting that the short float stands at a high 22%, which could provide fuel for outperformance if short sellers throw in the towel.

The company will release its December quarter results on January 23.  Analysts expect EPS of $0.31 on revenue of $668 million, both down from the year-ago period.

Based in Switzerland, Logitech International S.A. designs, manufactures, and markets hardware and software products that enable digital navigation, music and video entertainment, gaming, social networking, audio and video communication over the Internet, video security, and home-entertainment control.



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