Zebra Tech, Room in a Portfolio

Intro:


A name that is not popular, again, among my fellow investors is Zebra Technologies. Lets do a brief history and recap on this name, it not only helps me understand the name better, but it will help readers and followers. I still believe in diversification, I am very diverse: I own a web-infrastructure/website-security company, a disruptive insurance company, a SaaS that automates and controls the entire complex financial close process, and a marking/tracking/computer printing company! I do not like herd mentality, I like owning different names and being an educated contrarian. You can't be a contrarian, just to be a contrarian (at least in stock buying).


Overview:


Zebra Technologies was incorporated in 1969, originally called Data Specialties Incorporated. In 1982, the company became Zebra Technologies as their focus switched to on-demand labeling and ticketing systems. (This information is on their website by the way).

Anders Gustafssn, the CEO, quoted "We are living in an on-demand economy where organizations must digitize their operations to compete. The pace of change is accelerating. We are the pioneers at the edge of the enterprise and we are investing in innovations to empower front-line performance so brands can deliver differentiated service and care to thrive into the future".


One reason I think people have not paid attention to this name, is because they are "behind the scenes" of the operations. The company connects the person, to the data, optimizing workflows, operations and decisions in real-time. In return, this creates an efficient, impactful value-add for the business.


The company can be found in:

  • Retail and E-commerce

  • Manufacturing

  • Transportation and Logistics

  • Healthcare

  • Public Sector

  • Hospitality

You can see why I like this name, if you are not familiar with my strategy. We are getting insights into tons of industries, understanding how the economy is doing, as well as having a diversified end-market as a company. Having insights in MULTIPLE industries through one company? Count me in. Zebra even operates in the NFL, do you ever wonder how you get the Next Gen Stats? You can thank Zebra for that! With RFID chips in the football, and pads of the players! They have been partners since 2014. I can see why this company can be boring, its not upfront high growth, but it is certainly essential. And I like to buy businesses that are essential to the efficiency of others. The portfolio consists of Barcode printing, Mobile Computing, Data Capture, Locationing, Data Platforms, Software, Services, and Supplies. A lot to unpack here!


Third Quarter, 2020:


In their Q3 2020 Presentation, we can breakdown the segments and the key drivers and longer-term opportunity.

Healthcare is always a changing landscape, I had to do a discussion post during my MBA program one time where we had to talk about RFID and how it has changed the landscape. My example was that hospitals now have (Zebra Technology) to basically keep track of inventory, for instance each healthcare item will have a barcode on it. When you remove it from the cabinet, it gets scanned and send to a database where it will automatically order that piece of equipment and keep track of the inventory. Talk about efficiency! Anyway, we know how big of a boom Retail / E-Commerce has had. This is another way to play that trend in the markets, with the "order online and curbside pickup) Zebra has been a large beneficiary of this trend. Omnichannel demand has given Zebra a rise during the pandemic, certainly. An investment in e-commerce, is an investment in Zebra.


Zebra has obviously been financially affected by COVID-19, some Q3 highlights are Net Sales increasing .3% (better than expected), adjusted EBITDA margin of 20.3% (240bp YoY decrease) this was caused by large order mix + premium freight cost. Although it was a very well executed quarter, it was not fueled by growth. This doesn't bother me, because the company is in position for a large re-acceleration into growth 2021+ as COVID dissipates and hopefully goes away. As illustrated below, you can see the impact on a YoY basis, this is not a failed company that cannot grow their business..

Yeah, the company has a nice chunk of debt, not as liquid of a company I would like to see, but the upside is they have an untapped (it seems) revolving credit facility of $1b maturing in Aug 2024. Their net debt to adjusted EBTIDA ratio is 1.8x, as well as a share repurchase program (flexible) (increase is due to the acquisition of Reflexis, which we will look at down below).


Commentary was bright on the call. The quarter certainly surprised me. Enterprise customers have been prioritizing spending with Zebra. Zebra has expanded the relationship with a leading e-commerce retailer that is experiencing INCREASED order volumes.. (AMAZON?). "Innovation, quality, and value are critical partner attributes cited by this customer". One can only think, Amazon! Zebra is seeing more hospital deals and deployed more TC7 series mobile computers with the USPS Postal Carriers. Accelerated trends to digitize and automate workflows are increasing and rapidly evolving.


What is Reflexis? They are a leader in intelligent workforce management, and task execution, very fitting for Zebra already. Hundreds of retailers around the globe utilize their platform to drive employee productivity and retention, at the same time improving customer engagement. Zebra management believes Reflexis will be synergistic with their existing suite of solutions as a service (slide 12 of presentation).


The drivers (According to Anders): Healthcare, increased real time visibility into the patient journey and demand for innovative solutions to provide SAFE and EFFICIENT care. Retailers, prioritizing investment in Zebra Technology for the complex omnichannel fulfillment strategies and related warehouse automation needs. These demands are at record levels! Transportation logistics, strong e-commerce growth drives partial volumes and last mile delivery. Manufacturing, this area is still most impacted by COVID and global trade tensions, mixed trends but solid recovery in Chinese manufacturing (very net positive....).


Spreadsheet Values:

These estimates are provided by Finbox, connected to excel. I am building out a few spreadsheets in order to cut back on time. At current share prices, these are the forward P/Es, I absolutely expect beats on the bottom line. Below are the revenue growth forecasts.


To the left are efficiency metrics I like to keep track of (LTM).I am not here to give you price targets, or tweak my DCF models, honestly I think they are a waste of time. My time frame on this company is until I see the fundamentals deteriorate on bad management and ability to execute.




Fourth Quarter, 2019


Now, I want to go over some 4Q 2019 eggs because pre-covid is a better way to look at the company when they were not slapped in the face with a virus. In FY19, the company delivered 6.3% net sales growth (5.5% organic), 21.6% adjusted EBITDA margin (90bps YoY improvement), $12.94 in non-GAAP diluted EPS (17.5% YoY) and $624m in Free Cash Flow. These are great numbers, especially on the earnings growth. For FY20 they were guiding for 4-6% net sales growth, adjusted EBITDA margin of slightly more than 22%, and FCF of at least $700m. On the FCF front they are still guiding for YoY growth which I like, somewhere in the $650 range (up from $624m in 2019) growth of 4.2%.


Zebra is a company that got hit by tariffs, and their goal was to transition out of China for majority of their manufacturing. They have delivered on this promise and moved forward with global product sourcing. The goal was to mitigate this by mid-2020, and they have/still are. This gives me confidence that management has the ability to deliver on their guidance.


Zebra outlook for 4Q20 was an absolute blowout, hence the share price return since. Expecting net sales to increase 3-7% YoY as customers continue to recover from PEAK COVID-19 pandemic (a lot can change here, such as an unexpected shift in demand) and non-GAAP diluted EPS range of $3.70-3.90 vs $0.46 above consensus!


Summary:


I am long the stock, and will buy on bigger dips when I think it is necessary. I would actually like to build this to a 10-12% position. I believe the company is overlooked, and deserves a spot in a growing portfolio. The company is riding, and executing, on so many tailwinds. Zebra is a clear leader per IDC Report linked in the Sources & Links below:


Sources & Links:

https://www.zebra.com/us/en/about-zebra.html

https://www.zebra.com/content/dam/zebra_new_ia/en-us/corporate-and-brand/brand/corporate-fact-sheet/corporate-fact-sheet-en-us.pdf

https://www.si.com/nfl/packers/news/zebra-provides-next-gen-stats-and-so-much-more

https://s23.q4cdn.com/838148541/files/doc_presentations/2020/11/03/3Q20-earnings-slides-FINAL.pdf

https://s23.q4cdn.com/838148541/files/doc_presentations/2020/11/03/3Q20-earnings-slides-FINAL.pdf

https://seekingalpha.com/article/4384610-zebra-technologies-corporation-zbra-ceo-anders-gustafsson-on-q3-2020-results-earnings-call

https://www.logiwa.com/blog/warehouse-robotics

https://www.zebra.com/content/dam/zebra_new_ia/en-us/solutions-verticals/product/Mobile_Computers/certificate/mobile-devices-certificate-idc-marketscape-en-us.pdf





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