65% Return Since 2018 And Zebra Technologies Still Has More Left

Zebra Technologies (NASDAQ:ZBRA) is one of those stocks which have managed to offset the losses experienced in February and March. The stock is roughly around the levels where it was at the beginning of the year – thanks to the remarkable recovery that began in late March. Why? One simple reason. The company makes hand-held computers, printers, and scanners – Covid-19 has made these products more relevant. The pandemic has forced retailers to accelerate e-commerce adoption, and Zebra’s products become critical to ensure speed, accuracy, and efficiency. In addition, with workers returning, businesses are now demanding solutions to minimize the risk of an outbreak if a worker becomes infected. This is where Zebra’s RFID technology, typically used for tracking assets, can come in handy. But is this all? There is more to this story. Zebra’s stock has grown almost 65% for a good reason since 2018, and there is more room for it to grow! Trefis’ price for Zebra Technologies is $330, about 25% above the market price around $265 (as of July 14, 2020) based on the following triggers. 

Here Is What Could Trigger Further Upside

The first trigger is Zebra’s revenues. We forecast the company’s 2020 sales at $4.04 billion, down about 10% from $4.49 billion in 2019. That’s a decline but not the end of the world. To put it in context, some of the other industries such as hospitality, leisure, retail, and airlines are looking at 20%-40% drops in revenue for the full year. In addition, there is a critical offsetting factor for Zebra. Its clients are from a variety of industries and some of them are re-thinking their spending. However retail, in particular, could see a boost. This industry was already adopting automation to enhance the shopping and delivery experience, but changed conditions require working efficiently with fewer number of workers. This could accelerate adoption of technology products such as those offered by Zebra. In addition, long-term fundamentals remain strong – the value of data extracted through Zebra’s devices is going to be increasingly useful for retail, logistics, hospitality, and manufacturing etc. This is visible from the fact that Zebra’s revenue has increased nearly 20% between 2017 and 2019. As a result, we expect a sharp rebound of over 15% in 2021. At the same time, we expect the company to be able to maintain its 12% net margin, which has risen sharply since 2017.

So What Does This Mean For Share Price?

The combination of the above will imply 2020 EPS of $9.05 per share. How much should the market pay for each dollar of Zebra’s earnings? As a reference, to earn close to $9.05 per year from a bank, you’d have to deposit about $800 in a savings account today, so about 90x the desired earnings. But Zebra, though in demand, is still a riskier business. Investors need to consider competitive risks as well as economic risks as the company’s business is only as good as the health of the industries it serves. Some of them, such as hospitality, have been hit hard by Covid-19. And what does this mean? Simply that you will demand a lot more return for the dollar you invest in Zebra because as an investor, you will be taking these risks. In other words, you’ll pay less for each dollar of income than you’ll pay in a safe investment like a savings account. We apply a P/E of 36 for Zebra, which is higher than the figure at the end of 2019 (25) as well as the current trading figure (27). Our P/E is a blended mix of historical and forward looking P/E based on current market price. This higher figure is justified by the expected increase in growth rate beyond 2020. EPS for 2021 is expected to increase sharply and will bring down the P/E to current levels as the stock price adjusts.

Overall, we believe Zebra Technologies could grow its EPS significantly which justifies a P/E of 36 and gives us our $330 price estimate. This suggests nearly 25% upside, implying that the stock’s momentum could continue.

But Zebra is not the only one, there are other stocks out there that can unlock value. For instance, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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