Logitech International (LOGI +1.02%) is not as exciting as some other tech stocks that have flourished during the shelter-in-place period, but the maker of PC peripherals has experienced increasing demand for its products. Logitech's sales increased 15% year over year on a constant currency basis in the fiscal fourth quarter (ended March 31).
The stock is up 22% year to date as of this writing, significantly outperforming the S&P 500, which is flat for the year. Over the last five years, the shares have nearly quadrupled in value. Here's why Logitech continues to outperform and why investors should keep the stock on their radar.
Image source: Logitech International.
High demand for PC peripherals
Most of Logitech's largest sales categories saw a massive acceleration in growth last quarter. Adjusted for currency changes, sales of PC webcams increased 34%, keyboards and combos were up 13%, video collaboration up 62%, while gaming increased 10% compared to 13% in the year-ago quarter.
Here's how all of Logitech's categories fared in fiscal 2020:
| Category | Fiscal 2020 | YOY Change |
|---|---|---|
| Pointing devices | $545 million | 3% |
| Keyboards and combos | $572 millon | 8% |
| PC webcams | $129 million | 8% |
| Tablet and accessories | $135 million | 7% |
| Video collaboration | $366 million | 43% |
| Mobile speakers | $222 million | (2%) |
| Audio and wearables | $274 million | 0% |
| Gaming | $690 million | 8% |
| Smart home | $43 million | (11%) |
| Total revenue | $2.98 billion | 9% |
Data source: Logitech International. YOY= year over year. Growth rates are currency neutral.
Sales of products used for gaming increased just 8% for all of fiscal 2020 (adjusted for currency) but would have been higher if not for supply constraints. For the year, sell-through for gaming products increased in the 15% to 20% range, and growth in gaming further accelerated in April, as management reported during the conference call.
"The long-term secular trends that will drive sustainable growth in our three large businesses continue," CEO Bracken Darrell said during the earnings call. "While other companies are suffering drops in interest in their categories, this global crisis may have accelerated the trends underlying our big businesses."
Strong gross-margin performance
On top of solid top-line performance, Logitech also benefited from higher gross profit margin, which increased 180 basis points year over year, reaching the high end of management's long-term forecast at 39.8% in the recent quarter. This improvement is despite pressure from unfavorable currency conversion rates, China tariffs, and supply disruption caused by COVID-19.
The higher gross margin was credited to reduced product costs and a shift in sales mix to higher-margin categories such as PC peripherals, gaming, and video collaboration.
Gross margin is expected to tick down in the first quarter of fiscal 2021 due to higher logistics costs but should remain in management's long-term target range of 36% to 40%. Management is keeping the gross margin in that range and using the excess profit generated by higher-margin products to reinvest in the business.
Delivering results where it counts
Higher sales and faster inventory turnover contributed to a record year for cash generation. Cash flow from operations improved to $425 million, compared to $305 million in fiscal 2019. On May 27, Logitech announced a new $250 million share repurchase program and also approved an approximately 10% increase in the dividend.
While Darrell acknowledged that growth may not remain quite as robust once the threat of COVID-19 disappears, the trends in remote work and gaming will continue to drive growth in its biggest sales categories over the long term:
More and more people will work permanently from home, and an even larger percentage have found that they're comfortable working at home at least part of the time. That's a lot of home offices to establish, and as I said, a lot of them to upgrade later. Companies are already getting on this bandwagon of more work from home when it's over.
Looking ahead, management sees many unknowns, such as the duration of COVID-19's impact on the economy and the pace of any recovery. Logitech is also facing logistics disruptions and potential cost increases from air freight.
Still, management's outlook calls for fiscal 2021 sales growth in the mid-single-digit range on a constant currency basis. Overall, management believes this crisis has made its products even more relevant, which is why investors have sent this growth stock up 22% year to date.
