Deep Dive: Zebra Technologies (ZBRA)
Industrial 'picks & shovels' undergoing a cyclical hiccup
We believe shares of Zebra Technologies present an attractive opportunity to acquire a high-quality compounder - one that is momentarily out of favor - at a compelling valuation.
Historically, buying high-quality industrials during cyclical pullbacks has proven to be a dependable strategy for long-term investors. The caveat here is that they must have a strong underlying business and balance sheet to weather the cycle. High quality industrials often emerge out of the downturn even stronger.
Recently, Zebra has reported disappointing numbers for both Q2 and full-year guidance. FY23 revenue is projected to decline 20-23% year-over-year, due to the normalization of Pandemic-level demand. Weakness was especially evident among customers in the retail and logistics sectors, which are now digesting their capacities and delaying new purchases.
It's also worth noting a significant litigation settlement payment was made to competitor Honeywell, which reduced Zebra's net income by more than 40% last year. This places Zebra in an interesting spot - the company neither screens well on a trailing nor on a forward basis!
However, looking past the cyclical hiccup, we believe Zebra’s growth optionality is not being reflected in its current valuation. With America’s manufacturing construction activity at historically high levels (even after adjusting for inflation - see below chart), driven by onshoring and government stimulus, it should be a matter of time before spending trickles down to supply chain investments and new equipment purchases.
In addition, Zebra’s strategic pivot from a hardware-centric company to a solutions provider provides ample growth opportunities. Through the sales of software and automation technologies, management is laser-focused on delivering on new labor optimization solutions. Zebra has a highly capable management team with strong record of driving growth both organically and through strategic acquisitions.
All of this means that looking beyond the immediate slump, this is an attractive opportunity for patient investors. This report will delve into our conviction on Zebra’s business and management, its growth opportunities, challenges, potential disruptions, and valuation.