Keeping Logitech as a Buy

Logitech International S.A. (LOGI - Analyst Report) reported better-than-expected revenues for the fourth quarter of 2008 although earnings were below our estimates due to write-down of value of remaining CDOs. The company delivered a good quarter in terms of revenues despite weaknesses in its cordless keyboard and gaming segments.

Gross margins reached a high of 35.6% for the company, reflecting ongoing product cost reductions and supply chain efficiencies. We now estimate that the company will continue to grow revenues and GAAP EPS by 15% and 10.1% respectively in 2009 over 2008 figures, due to the continued strength in its pointing devices, remotes, keyboards and good performance in OEM category.

After adjusting our model, we now expect the company to earn $1.64 per share in fiscal 2009 from our previous $1.70 estimate which includes stock-based compensation, but excludes the one-time losses from CDOs, and we have fixed a price target of $38 over the next six months based on our 10-year DCF model. This evaluation methodology gives us a forward P/E slightly above 23.1x our fiscal 2009 earnings estimate, which we now believe is reasonable.

LOGI’s return on equity has consistently been close to 30% since 2003, and we continue to believe the company will generate strong returns on equity as its leverages its supply chain, and maintains its operating margins. We expect LOGI to continue to return over 20% on its equity for the next several years.

The new collaboration on video over Internet will strengthen its offerings in the retail video space which has been lagging lately. The acquisition of WiLIfe Inc. will enable Logitech to offer PC-based video solution for self-monitoring a home or smaller business, a new line of offering. It is for these reasons that we continue to rate LOGI a BUY with a target price of $38 over the next six months.

Udayan Mukherjee contributed to this report.

Read the full analyst report on LOGI.

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