Zebra Technologies Stock: Another Compounder On My Watchlist (NASDAQ: ZBRA)

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Why Now?

Zebra Technologies (NASDAQ:ZBRA) is a sub $ 20B market cap company that has returned over 200 percent returns in the last 5 years and is often overlooked or not commonly known. As of May 25th2022, Zebra is down 45 percent year to date, but is now coming into a reasonable valuation with reasonable historical returns on investment and EBITDA growth. Currently, the company trades at a P / E Non-GAAP FWD of 17.07, P / E GAAP FWD of 19.7, and have a 15.8 percent YOY EBITDA growth for the last 5 year. Although Q1 22 free cash flow of $ 40M is down year over year due to higher incentive comps, Zebra has $ 141M in cash and cash equivalents with a net debt to adjusted EBITDA ratio of .8x. I believe this company provides growth at a reasonable price and offers less market volatility allowing investors to still have some exposure to Artificial Intelligence and Machine Learning.

Profitability Grade and Underlying Metrics

Zebra Profitability Grade (Seeking Alpha Website)

Zebra’s Background

Zebra Technologies was founded in 1969 and is headquartered in Illinois. Zebra contains a robust portfolio consisting of the following business / products: Printing and supply specialties, barcode scanning products, tablet and mobile computing, workforce management / execution solutions, RFID, and many more. Zebra specializes in Enterprise Asset Intelligence and aids business in retail and e-commerce, manufacturing, transportation, logistics, healthcare, and also other segments and companies throughout the public sector. Furthermore, Zebra’s products capture and move data via cloud software subscriptions. Zebra’s hardware, software, supplies, and services allow users to connect people, assets, and data, improve accuracy, and ultimately transform the customer experience for the better.

Zebra Fact Sheet

Product Log of Innovation (Zebra Fact Sheet)

Current and Potential Growth Opportunities

There is plenty to be excited about for future innovation and future returns for shareholders. Zebra, for the third year in a row, was recognized by Gartner in the 2022 Gartner Magic Quadrant as the leader for indoor location services. This just proves the stickiness of Zebra’s business and products. Additionally, in July 2019 the Board of Directors authorized a share repurchase program. This plan authorized and totaled the amount of $ 1 billion of its outstanding shares of common stock. As of April 2, 2022, they repurchased 1,944,616 shares of common stock nearing $ 608M under the current plan. This leaves the remaining amount of authorized share repurchases of approximately $ 392 million. After the first quarter, they will have repurchased 274,166 shares, for nearly $ 108M through the 29th of April. Additionally, on May 17th of this year Zebra’s management announced another $ 1B stock buyback plan.

Global

Magic Quadrant for Indoor Location services (Zebra Technologies Website)

On May 19, 2022, Zebra was recognized as the “Best Overall mHealth Hardware Solution” from MedTech Breakthrough, which is an independent organization that recognizes the top companies, technologies and products in not only the global health market, but also the medical technology market. This is the fifth year consecutively that Zebra has been awarded a medical technology breakthrough award. On May 4, 2022, Zebra announced the new TC53 / TC58 mobile computing series. These products come equipped with both 5G and Wi-Fi 6E wireless / sensor technologies. I also wanted to pull a quote from the press release for these products.

The TC53 / TC58 series enables front-line workers in retail, postal / courier, and field service organizations to leverage mobile dimensioning, mobile point of sale (mPOS), and connected workforce applications that improve productivity and enhance the customer experience.

In my opinion this is the next step in a future of ease-of-use products yet to come. Another noteworthy contribution, is that becoming available in the second half of 2022 the Zebra Dimensioning, Certified Mobile Parcel, will be an industry-first solution. This product will aid in calculating parcel sizes and shipping charges. These improvements will improve time for services and shipments.

Zebra Technologies First Quarter 2022 Results

Sale Growth TAM (Zebra Technologies First Quarter 2022 Results)

Growth on the top and bottom line have been aided by numerous acquisitions over the past few years. I will briefly cover the most recent. On March 14, 2022, Zebra agreed to acquire Matrox Electronic Systems, Ltd. This company will become part of the EVM segment. The purchase price of $ 875M is expected to close mid 2022. On October 7, 2021, Antuit Holdings Pte. Ltd. was acquired for $ 145M in cash. Antuit was a provider of demand-sensing and pricing optimization software solutions. By acquiring Antuit, Zebra adds a portfolio of software solution offerings to customers in retail and consumer product. Fetch Robotics was acquired by Zebra in August of 2021, adding autonomous mobile robot solutions and robot automation to Zebra Technologies’ portfolio. The last one I will mention is that in May 2021, Adaptive Vision Sp. z oo, better known as Adaptive Vision, was acquired. Adaptive Vision was a provider of graphical machine vision software with applications in the manufacturing industry, again adding to the EVM segment of Zebra Technologies.

Financials

For Q1 2022, Free Cash Flow came in at $ 40M, down year over year due to higher incentive comps. During this quarter Zebra spent $ 305M in share repurchase and $ 5M in venture investments. All this said, it is leaving 141M cash and cash equivalents with a net debt to adjusted EBITDA ratio of .8x. For Q1 2022, total net sales increased slightly over 6 percent, to $ 1.4B or an increase of $ 85M when compared to a year over year period. Enterprise Visibility and Mobility Net sales growth was partially offset by a decline in Asset Intelligence and Tracking Net sales. Excluding effects from the acquisitions partnered with currency changes, Zebra’s increase in Organic Net sales was 5.4 percent.

Total Net sales for Enterprise Visibility and Mobility Segment increased 12 percent to $ 117M due to higher sales of mobile computing products. Gross margin decreased to 46.5 percent in the current quarter compared to 49.0 percent in the prior year, primarily due to higher premium freight and component part costs. Operating income for the current quarter decreased 1 percent when compared to the same period last year. This decrease was due to higher gross profit, partially offset by higher operating expenses. Total net sales for Asset Intelligence and Tracking segment decreased $ 35M or 8 percent. This decrease was due to lower sales of printing products. Gross margin decreased to 39 percent for Q1 22 compared to 48 percent in Q1 21. Again, this was primarily due to an increase in premium freight and components and parts costs.

Zebra TTM Total Revenue

Zebra Total Revenue Growth Chart (Seeking Alpha Website)

Total Net Sales for the following geographical customers increased across the board:

  • North America: 699M with a 3.9 percent increase
  • EMEA: 500M with a 2.0 percent increase
  • Asia / Pacific: 149M with a 24.2 percent increase
  • Latin America: 84M with a 31.3 percent increase

Looking forward through 2022, Zebra expects Q2 2022 adjusted net sales to increase between 3 and 7 percent when compared to Q2 2021. This expectation assumes impacts from acquisitions. Adjusted EBITDA margin Q2 22 is now expected to be around 20 to 21 percent including $ 60M in supply chain costs. Non-GAAP earnings per diluted share are expected to come in near $ 4.05 to $ 4.35. For a full year 2022, Zebra expects adjusted net sales to increase 3 to 7 percent from 2021. This rate factors in a roughly 50 basis point negative from both foreign currency and acquisitions.

Adjusted EBITDA is now expected to be approximately 22 to 23 percent, factoring in $ 200M impact from supply chain costs. Full year 2022 Free Cash Flow is expected to be at least $ 800M. However, one thing to note is that current guidance does not include projections or results from the acquisition of Matrox Imaging.

Risks

The main concern I see is business exposure outside of the United States. Zebra sells a strong portion of products outside the US and has business operations outside the US with a point worth mentioning that Zebra also purchases components via those many who have operations located in China. Zebra has identified these risks in both the most recent 10-Q and 10-K, referencing risks associated with operations, sales, and purchases outside the US Fluctuations of foreign currency could impact sales while simultaneously increasing costs of goods Over the past few months there has been an increase in the volatility of foreign credit markets and currencies. Over time, these may impact the finances of primary customers and suppliers of Zebra. Additionally, Zebra stated that an increase in restrictions on exports or imports for certain technologies could impact the ability to purchase or sell in specific markets.

Current world affairs and the war with Russia and Ukraine could result in adverse impacts on the Zebra business. On March 5, 2022, Zebra suspended operations within Russia. The rise in instability and uncertainty of the war could at some point potentially have had an impact on shipping of products. Further, those impacts directly impact the ability to sell products in diverse regions. If the current affairs continue longer, the risk of increased costs to logistics increases. Additionally, supply chain issues could arise as a result. Time will tell over the next few months how this risk plays out.

Other notable events to keep an eye on over the next quarter and for the full year are regarding operating expenses and more. Operating expenses rose slightly in the first quarter of 2022 when compared to 2021. Selling and marketing increased from $ 134M to $ 152M, Research and Development decreased from $ 140M to $ 137M, and acquisition and integration costs rose from 1M to 4M. The future will tell if these are one-time increases, or if the increase in expenditure will continue.

Closing Thoughts

Again, sitting under a $ 20B market cap, Zebra Technologies is in a perfect spot where it offers growth at a reasonable price. Zebra has $ 141M in cash and cash equivalents with a net debt to adjusted EBITDA ratio of .8x. I believe this company will continue to compound for the next 3 to 5 years, especially with e-commerce continuing to grow. As I mentioned in my intro, having less volatility will allow investors to have indirect exposure to Artificial Intelligence and Machine Learning through an investment in Zebra. I think Zebra stands as a buy at these levels as long as you plan to hold for the longer term.

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