Zebra Technologies (Nasdaq:ZBRA) has a fitting name, as the bar codes it helps clients create closely resemble a Zebra's stripes. The business has also fallen prey to a downturn in business activity, which has resulted in inventory destocking and less of a need for tracking items in warehouses and while in transit. However, the industry has long-term appeal, and Zebra is one of the only pure play operators running in the field.
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Business Overview
Zebra's primary business consists of offering printing device hardware that clients can use to create bar codes and similar devices that are capable of "identifying, tracking and managing assets, transactions and people." One of these solutions consists of encoders containing passive radio frequency identification (RFID) technologies. RFID is part of Zebra's business but has not proved the industry panacea that was widely predicted when the technology was just introduced.
Bar codes and related labels can be customized by clients and this leads to the ability to sell consumable printing supplies and software to help tag goods according to individual client preferences. This also leads to service and repair revenue. For the latest fiscal year, hardware sales represented 72.2% of total sales, supplies 17.6%, service and software 10.8%, and shipping and handling charges the remaining balance. In terms of clients, Zebra listed 7.5 million across the globe in its most recent 10-K filing. Client diversity would be considered a strength, were it not for the fact that wholesale distributor ScanSource (Nasdaq:SCSC) has accounted for more than 15% of sales over the past three years.
Zebra lists many competitors in the bar code label industry, and considers Lexmark (NYSE:LXK), Avery Dennison (NYSE:AVY), Dover (NYSE:DOV) and Danaher (NYSE:DHR) its rivals, even though none of these firms are pure plays in the industry. Avery Dennison is a solid comparable, given it sells barcode printers and RFID devices. But like the others, it also operates in many other industries, with Lexmark in the printer space but focused on homes and offices, and Dover and Danaher offering tools and devices for a wide array of industrial applications. (For more, check out Technology Sector Funds.)
Profit Picture
Zebra's operations have been hit by recent global economic turmoil. First quarter sales fell 22% to $192.6 million and earnings plummeted 66% on a one-time charge and lower overall profitability. Earnings did end up beating analyst projections but the full-year outlook is grim as analysts only expect 93 cents in earnings. This is below the bottom-line figure reported in 2006.
The Bottom Line
Last year's return on equity ratio stood at 16%. And since Zebra possesses no long-term debt, this is also the return on invested capital ratio, and demonstrates that the company generates more than sufficient returns for shareholders. The wild card is when the sales and profit outlook improve, which is obviously uncertain. As such, the share price may be a bit ahead of itself, with a dip back below $20 perhaps a better entry point. (To learn more, read Spot Quality With ROIC.)
