gremlin
gremlin
Towards the end of 2023, I believed that shares of Zebra Technologies (NASDAQ:ZBRA) had seen a big run in an uncertain period of time. The company has seen a very tough 2023 amidst supply chain disruption and change in fortunes of its (e-commerce) clients post pandemic.
Quite frankly, sales and subsequent earnings declines were so severe that leverage concerns could not be ruled out. A rally in the shares tempted me to take profits as uncertainty on the 2024 results remained. Fourth quarter results, but moreover a solid guidance for 2024, alleviates these concerns, creating a roadmap for sequential improvements from here.
Zebra is a so-called EAI solutions provider which supplies products and related services which allow for automatic identification and capturing of data. Applications to think of include RFID scanners, printers and related products, predominantly used in e-commerce, warehouse and logistics settings.
Pre-pandemic, Zebra was a $4.5 billion business which posted net earnings of $544 million, resulting in decent margins, as earnings came in around $10 per share. Such earnings power, given its positioning, made a prevailing $250 share price look quite reasonable.
A strong momentum run during the pandemic sent shares up to $5.6 billion in 2021, as earnings improved to $18 per share, with investors extrapolating such earnings power, and subsequently pushing shares up to levels around the $600 mark. Amidst tougher comparables, 2022 revenues were up just 3% to $5.8 billion as earnings fell around a dollar to $17 and change, or $15 per share if we exclude for stock-based compensation charges.
A net debt load of $1.9 billion looked manageable with EBITDA reported around $1.2 billion, as the original 2023 sales guidance was not too inspiring, with sales originally seen down by around a percent. That guidance quickly went out the window as second quarter sales fell 17%, with third quarter sales down more than 30%, and even worse, fourth quarter sales were seen down by mid-thirties percentages.
Amidst this, it was not just sales which would fall back to pre-pandemic levels, but more so earnings which would take a massive beating. Net debt ticked up to $2.2 billion, rapidly increasing leverage ratios to around 3 times, as EBITDA might fall to about $600-$700 million.
The tougher results were attributed to tough comparables, inventory destocking and higher interest rates weighing on the willingness of clients to invest in automation. Moreover, with no signs of a recovery seen for 2024, I was cautious as shares rallied to the $275 mark by year-end.
Since the end of last year, shares have traded in a volatile and relatively wide range so early into the year, with shares now trading at the higher end of a $240-$290 trading range.
This followed the release of the fourth quarter results in mid-February, a quarter in which revenues were down nearly 33% to $1.01 billion, as full-year sales were down 21% to $4.58 billion. The company posted a near two-thirds fall in fourth quarter earnings to $89 million, with full-year earnings down 45% to $508 million. Full-year earnings came in a few pennies short of $10 per share, although they only trended at $7 per share based on the fourth quarter results.
Fortunately, net debt ticked down a bit to $2.1 billion, as modest deleveraging is desired after fourth quarter EBITDA of $155 million only trends around $600 million here, for a leverage ratio in the mid-3s.
The real promising news is that 2024 sales are seen up around a percent, plus minus two percent, suggesting full-year revenues to come in around $4.6 billion, which indicates that some sequential improvements are expected here. EBITDA margins are seen around 19%, with margins seen at or above 20% by year-end, suggesting that EBITDA is seen around $880 million, as this should quickly drive down leverage ratios.
This is in part driven by further cost reduction plans, now expected to save expenses by around $120 million, up twenty million from its previous estimates. This is quite comforting, as the combination of flattish sales, but moreover a slight increase in margins, suggests that earnings might improve to around $11 per share.
Management feels confident in issuing a modest increase in full-year sales, amidst improvements in order activity, yet it is too early to speak about a broad-based market recovery. Nevertheless, these signs are certainly encouraging, certainly with sequential improvements in the results being anticipated.
While no convincing recovery is seen in 2024, it seems evident that some bottom has been found, with sequential revenue growth expected soon in 2024. In fact, modest sales and earnings growth is predicted, as double-digit earnings per share number provides a bottom under the shares, alleviating any leverage concerns.
This is itself is quite comforting, and I understand why shareholders act relieved as shares trade in the high $200s now, around 26 times forward earnings here. The truth is that shares have hardly advanced versus pre-pandemic levels, but the same applies to both sales and earnings.
Amidst all this, I continue to hold a modest long position, seeing no need to alter this position right here, although the worst of the woes appear to be a thing of the past right now.