Zeroing-in on Zebra (ZBRA)

 

 

Zebra Technologies (ZBRA) is a leading manufacturer of bar code and radio frequency identification or RFID technologies that are used to encode data at the point of sale (by retailers, for example) or the point of issuance (such as by libraries).  ZBRA makes the printers, software and related supplies.

 

Like many stocks in 2008, ZBRA’s price has declined significantly this past year: -35% in the last 12 months, -34% in the last six, and -12% in the last three.

 

Here is a comparison of RobertG’s SSG from Better Investing’s First Cut with mine and with Take Stock.

 

Zebra Tech (ZBRA)	RobertG	ArminF	Take Stock
Date	11-19-08	12-26-08	12-26-08
Data	S&P	S&P	Hemscott
Price	$18.64	$19.17	$19.17
52 week High & Low Price	$38.47 & $16.18	$38.97 & $16.56	n/a
Project Growth From	Last Annual	Last Quarter	Last Annual
Sales Growth	09.10%	10.00%	09.10%
EPS Growth	10.20% (see A)	10.00% (see B)	-0.60% (see C)
High PE	29.9 (see D)	20.0	24.8
High EPS	$2.71	$2.72	$1.58
High Price	$81.00 (16% > VL’s Est High End)	$54.40	$39.22 (22% < VL’s Est Low End)
Value Line Estimated High Price = $50-70 at $19.59 as of 12-12-08
Low PE	18.8	12.1	14.3
Low EPS	$1.62	$1.69	$1.62
Low Price	$16.60 (recent severe low)	$09.70 (60% x 52 week low)	$39.22
Upside- Down Ratio	30.0 (see D)	3.7	impossible to calculate
Total Return	34.2%	23.2%	14.3%
SSG Buy Under	n/a	$20.88
RV/PRV	45.3/ 41.2 (2 yrs out)	46.5/42.4 (2 yrs out)	n/a
Quality	n/a	S&P = B	TS = 1.10 unacceptable
PTPM – 5 yr ave	24.0% trend down (see E)	same	24.0% trend n/a
ROE – 5 yr ave End Equity	13.4% trend down (see E)	same	n/a
ROE – 5 yr ave Start Equity	n/a	15.2% trend down	15.1% trend n/a
Debt to Equity – 5 yr ave	n/a	-0- trend even	n/a

 

(A) Robert’s SSG from BI’s First Call mentions that ZBRA has made four acquisitions in the last 2 years, but does not explain how or why he estimated future growth at 9.1% Sales and 10.2% EPS.

 

(B) When I did my SSG, the six analysts I always check were estimating long-term EPS at around an average of 13.55% with VL low at 7.50% and FactSet CallStreet via CNN Money and S&P both high at 15.00%; First Call via Yahoo Finance was 14.40%, Zacks was 14.67%, and Reuters via Morningstar was 14.80%.

 

FactSet’s estimate was from four analysts who ranged from a low of 12.00% to a high of 15.00%.

 

The analyst estimates were anticipating future EPS to increase substantially as ZBRA’s historic EPS averaged only 5.0% during the last 5 years and sunk to 3.0% in the past 2 and 3 years.

 

I estimated 10.00% EPS growth, lower than all the estimates but much more than ZBRA’s historical growth.  Because of our recessionary market, I think it is sensible for my estimates of future EPS and High PE to result in a Forecast High Price ($54.40) that is at the low end of VL’s estimate ($50-70).

 

(C) Take Stock estimated EPS growth at an untrasonably low -0.6% which meant that its Forecast High Price was also unreasonably low.

 

(D) Robert removed 2 years of outliers from ZBRA’s High PE which then became his Forecast High PE of 29.9.  However, PEs have been trending down and it looks like he didn’t realize that his average was higher than 2007’s 25.4.  That’s why his Forecast High Price is way higher than VL’s estimate and why he got an unreliable 30.0 Upside-Downside Ratio.

 

BI’s Stock Selection Handbook states: “When you see a large upside-downside ratio, revisit your judgment in [SSG] Section 3 and the forecast low price.  You should probably reduce your forecast low price even further.” [page 112, 2003 edition]. Although the Handbook does not define a large U/D, it does say that 3.0 is the minimum needed for a SSG Buy and I consider any double digit U/D as untrustworthy.

 

(E) Two red-flag warning signs are that ZBRA’s Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE) are trending down.  Trending up is desired, trending even is OK, but down is not good, so bad that some BI/NAIC gurus would not complete any SSG with even one downtrend.  However, keep in mind that ZBRA’s 5 yr average PTPM is much better than its industry average (24.0% vs 16.1%) while its ROE is only slightly worse (13.4% vs 14.2%).

 

Would you Buy Zebra or not Buy based on what you see here and how important are the downtrends?

 

– Armin