On Apr 4, we upgraded our recommendation on Logitech International SA (LOGI) to Neutral from Underperform. Our new investment thesis is supported by a Zacks Rank #3 (Hold) for the stock. However, we remain disappointed with the company’s weak third quarter fiscal 2013 results and are also concerned about the low demand for Logitech products in the EMEA (Europe, Middle East and Africa) division.
Furthermore, Logitech operates in a highly competitive market, wherein smaller, mobile computing devices, such as, tablets and smartphones with touch interfaces are increasingly gaining in popularity, while demand for desktop PCs is declining. These factors have been continuously affecting both the top- and bottom-line of the company over the past four to five quarters.
Why the Upgrade?
Recently, Logitech launched a number of new and innovative products. The new tablet accessories and gaming accessories are expected to benefit the company in the long run. Given the current trend towards smart phones and tablets, Logitech intends to tap this high potential market through its range of accessories. In the last reported quarter (3Q13), tablet accessories was also the best-performing retail product category, with sales increasing a robust 119.2% year over year to $39.4 million.
In addition, the company’s cost-cutting initiatives are expected to benefit Logitech, saving approximately $12 million to $14 million in the fourth quarter of fiscal 2013. These savings will be primarily induced from employee retrenchments of 140 employees, or 5% of its workforce as part of its cost cutting measure.
Moreover, the company is discontinuing with its non-profitable products and businesses. The company divested its remote control and digital video security categories with further plans to discontinue other non-profitable products, such as speaker docks and console gaming peripherals by the end of 2013.
Stocks That Warrant a Look
While we expect Logitech to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, we are bullish for Synaptics Inc. (SYNA) carrying a Zacks Rank #1(Strong Buy). Other companies like Alps Electric Co. Ltd. (APELY) and Analogic Corporation (ALOG) also have good buying opportunities. These computer and peripheral equipment companies with a Zacks Rank #2 (Buy) have the potential to rise significantly from the current levels.
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