EUR 850.00 For Business Accounts Only

Morningstar | Zebra Fast Out of the Gate in 2019; Maintaining $215 FVE

Zebra reported first-quarter results that were slightly above our expectations, with revenue modestly outpacing our model and operating leverage helping offset slightly weaker gross margins to drive adjusted earnings at the high end of guidance. Management also slightly upped its full-year revenue guidance due in part to a recently completed acquisition. However, since our forecast is still well within the updated outlook, we will maintain our fair value estimate of $215. While we did not see anything in the results to warrant the sizable decline in shares after they traded down nearly 7%, there’s still not a healthy margin of safety. However, should shares hit 4-star territory, we would be interested buyers because of the firm’s combination of narrow-moat-worthy switching costs and secular tailwinds.

Revenue in the first quarter was $1.07 billion, a year-over-year increase of 9%. On an organic basis, sales were up 7.9% after removing the impact of foreign exchange and recent acquisitions. Software and services sales were up 3% over the same period, while tangible products increased by 10%. By segment, enterprise visibility and mobility led the charge with year-over-year growth of more than 13%. Management detailed that the Android operating system, where we believe the firm has particular advantage, now accounts for the majority of new mobile computing products industrywide. As noted in our recent report, Zebra has 60% of the Android share in the market and a strong (and growing) technological portfolio, and we believe it will be the main beneficiary from the ongoing transition to Android. Sales in the legacy asset intelligence and tracking segment were more muted, growing just over 1% year over year but with solid performance from higher-margin supply and tabletop printer sales.

The firm also completed the acquisition of healthcare temperature monitoring and asset tracking company Temptime, as previously expected. Like the Xplore acquisition in 2018, we believe the strategic rationale behind the purchase is sensible, as it should allow Zebra to gain additional share in key growth markets like healthcare, while we also anticipate that Zebra will be able to leverage the acquired technology into other markets as it has previously done. For example, management highlighted how its data capture portfolio was finding traction outside the core markets (retail, healthcare, manufacturing, and logistics) and with Italian gaming company that used Zebra’s identification products to comply with anti-money-laundering regulations.

For the upcoming quarter, management expects revenue to grow by 8% year over year to $1.09 billion due to strong performance in the enterprise visibility segment and the impact from acquisitions. Adjusted EBITDA margin is expected to contract roughly 60 basis points sequentially at the midpoint of guidance to 21.5%.