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Zebra Technologies (Nasdaq: ZBRA)

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September 15, 2011 – Comments (0)

Here's another one I've had on the watchlist for a while. Zebra Technologies (Nasdaq: ZBRA) hit my radar back in March of this year. I don't even think I've ever mentioned on this board (at least not that I can recall), but the price has been creeping down a bit since it first caught my eye at around $38 per share. I felt then that it was very fairly priced if not a little enthusiastic. But now at $32 it has really got my interest level up there.

The company

Zebra designs, manufactures and sells specialty printing devices that print variable information on demand at the point of issuance. So what are the purposes or uses of this technology? These devices are used for automatic identification, data collection and personal identification in applications that improve productivity, deliver better customer service and provide more effective security. The business is broken down into two main segments: Zebra Specialty Printing; and Zebra Enterprise Solutions.

Zebra Specialty Printing
•  High-quality labels, tickets, receipts, and plastic cards; barcodes and personal ID products, passive RFID used for routing and tracking, patient safety, transaction processing, and identification and authentication.
•  They also offer printer supplies including thermal labels, wristbands, plastic cards, laminates and ribbons. While parts don’t necessarily have to be genuine, it is obviously encouraged.
•  Printer-related software for use with Zebra systems to maximize potential and efficiency.

Zebra Enterprise Solutions
•  Proprietary asset tracking and management solutions to optimize the flow of goods within the supply chain
•  RTLS (real time locating systems) and GPS (global positioning systems), active RFID
•  Customers for ZES include airport operations, distribution operations, personnel safety and security and manufacturing operations.

What are they selling?

Direct thermal and thermal transfer label and receipt printers, passive radio frequency identification (RFID) printer/encoders and dye sublimation card printers as well as a range of specialty supplies consisting of self-adhesive labels, thermal transfer ribbons, thermal printheads, batteries and other accessories, including software for label design and printer network management.

As of 12/31/2010 Zebra offered 54 thermal printer models with numerous variations. All Zebra printers use thermal printing technology in the form of direct thermal printing, thermal transfer printing or dye-sublimation printing.

Who are they selling to?

Customers include manufacturers, service and retail and governments. Geographic segments include: North America, EMEA, Latin America, and Asia. In 2010 revenues broke down, respectively 43%, 35%, 9%, and 13%. There are a number of channels of sales, via distributors, value-added resalers (VARs) and OEMs. Internet and telesales for media and consumables.

Zebra has sold more than 9,400,000 thermal printers to customers as of 12/31/2010. ScanSource is the company’s most significant customer with a percentage of net sales at 18.5% (2010); 16.1% (2009); and 15.4% (2008). It is worth noting that ScanSource is a global distributor and no other customer accounted for more than 10% of net sales during these years.

Competition and Risks

There are many tangential competitors in this line of work, but many only compete with one particular product or line, so there aren't many pure play competitors which gives Zebra a healthy share of this overall market thanks to the diversity of their entire business. Other risks include:
•  Zebra now outsources the assembly of their printers to Jabil; intellectual property risk, risk of fabrication delay, quality;
•  Significant global exposure, risks inherent with this;
•  Part of growth strategy is through potential acquisitions;
•  ZES and its performance; this is difficult work and if they don’t pull it off it could affect the rest of the business.

What is this thing worth?

When I first started looking at Zebra the stock was trading for about 20 times trailing earnings and an EV/EBITDA of 10.5. Today those numbers are 15.5 and 7.6 respectively. Average numbers over the last ten years have those numbers at 26 and 13 respectively. So from that perspective it could be historically cheap if there's a reason for business to continue to grow at the 7% CAGR or better we've seen over the last decade.

On a discounted cash flow basis if I grow top line revenue at an average of just under 5% for the next 10 years with a 2.5% terminal rate and an 11% hurdle rate I could see shares being reasonably worth about $38. This also assumes incremental operating margin improvement over time along with the $4.75 in cash per share on the balance sheet.

Who’s Managing This Company?

Anders Gustafsson has held the CEO position since 9/2007. He replaced co-founder Edward Kaplan who was CEO for 37 years until he retired in 2006. Though Mr. Kaplan no longer has any affiliation with the company, its other co-founder, Gerhard Cless still owns 3.7% of the shares outstanding and serves as the executive vice president and director. Cless and Kaplan founded the company back in 1969.

Today, Gustaffson serves with CFO Michael Smiley (2008) as well as a board of 7 (2 internal/5 external; Gustaffson and Cless the 2 internal). The compensation committee is made up of all externals. In total, insiders hold just over 4.5% of shares outstanding.

What are some arguments for investing in this company?

•  Having such a large installed base of printers and equipment the company will continue to benefit from recurring sales.
•  Geographic diversity gives some protection from tough economic conditions; significant growth expected in emerging economies over the coming years.
•  The entire RFID market is projected to be $12.7 billion in 2015, up from $5.6 billion in 2010, Zebra will get their share.

Is there a bottom line here?

The company has strategic alliances with IBM, Motorola, Oracle and SAP among others. In fact they work with about 90% of all global Fortune 500 companies, so they are a known name and already integrated into many systems. While switching costs may not necessarily be high for companies, it could be troublesome enough for them to want to avoid doing it, especially if they already have an established relationship with a company like Zebra.

To date the company has sold more than 9 million printers. This is important as they benefit substantially from the recurring sales of the higher margin printing supplies to the tune of about 20% of total revenue. While ZES is yet to be profitable, the expectation is that it will as it becomes more established. Operating margins over the past four years have suffered mainly due to getting ZES up and running. While management doesn’t expect 2011 to be the breakeven year for ZES, they do expect it to come around.

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