Logitech Slowly Becoming A Bargain (LOGI)

Shares of Logitech International (NASDAQ: LOGI) are trading lower after the company withdrew its guidance.  What is interesting is that the stock of this Swiss computer and gaming peripheral leader is holding up far better than many may have guessed.  There are reasons behind at least some of the relative stability despite the severity of the news.

For starters, it did something worse than just lowering guidance.  It withdrew all of its targets.  It gave no new targets and only saidit would update its business conditions in two weeks during its fiscalthird-quarter review.  Thomson Reuters (First Call) pegs estimates at $0.53 EPS on $742 million in revenue for the current quarter. Estimates for the fiscal year ended in March 2009 are$1.42 EPS and $2.50 billion in revenue.

The CEO noted several items which many others have echoed:

• "retail environment deteriorated significantly…"
• "varying degrees of weakness across all geographies and channels…"
• "customers reduced inventory levels…"
• "we expect the economic environment to worsen in the coming months…"
• "what is likely to be an extended downturn.”

The company is also slashing its salaried workforce by 15% and willrecognize those charges in the following quarter.  The company has about 9,400 employees.  Logitech is thelargest pure-play stock for computer peripherals and it is active ingaming peripherals.  It requires no genius to realize that both sectorsare off.  Gaming sales are soft, and you no longer have to buy newperipherals if you upgrade your PC.  In fact, many of these cheapernotebooks and netbooks may not need any peripherals.  So why are shares only down 9% at $14.65 today? 

The company’s market cap is currently around $2.6 billion.  Its 52-weektrading range holds little relevance today, but it is $11.10 to$34.38.  Shares had lost roughly two-thirds of their value due to theobvious weak stock market and declining consumer spending. 

In thepast, we have even noted this company could be a potentialacquisition for Microsoft.  Imagine all the subliminal advertising if you suddenly saw "Microsoft" written on all your peripheralsrather than "Logitech."  Microsoft already does sell some branded peripherals.  Sure, that is probably not a smart use of money rightnow in today’s market where the value of ALL advertising is depressed.But history dictates that weakness in all sectors is eventuallyreplaced by a rapid expansion off of lows.

The P/E trading under 10.0 and other current valuation metrics are nowthrown out the door.  In fact, the expected growth will now be thrownout the door and you should expect that most of the analysts whichcover the stock are already trying to lower their estimates.

Traders and investors appear to have been accumulating positionsafter the sell-off and during the recent recovery.  It is doubtful thattoday’s prices mark any extreme bottom.  In fact, any additional marketweakness will now only allow traders to sell their weaker-news stocks.But there is still a 30%+ cushion in today’s prices before this onereaches any new 52-week lows.

Logitech has virtually no long-term debt.  It has more than $450 million incash.  It also just signaled that it is going to be running much leaneroperations.  It also has significant shelf presence in PC and consumer electronics retailers, as well as most online stores.

It might be hard to call this a value stock and it might be hard todraw any steady lines in the sand.  But it would seem that traders andlong-term investors might have some ambition that all those peripheralswill need to be replaced through time.  If that is the case, thenLogitech’s woes won’t last forever.

Jon C. Ogg
January 6, 2009