Why Did Zebra Lose 3% Despite Upbeat Q1 Results?

Zebra Technologies Corporation (NASDAQ: ZBRA) has delivered impressive results for the first quarter of 2022, as earnings and sales beat consensus estimates by 3.6% and 4.4%, respectively.

Despite the better-than-expected results, Zebra failed to lift market sentiments due to higher expectations of supply-chain costs and lower margins. Shares of this $19.4-bilion company slipped 3% to close at $368.14 on Tuesday.

Zebra is a specialist in manufacturing and providing data capture and automatic identification products. It is headquartered in Lincolnshire, IL.

Financial Highlights

Zebra’s earnings stood at $4.01 per share in the quarter, higher than the consensus estimate of $3.87 per share. On a year-over-year basis, the company’s earnings per share declined 16.3% as the positive impacts of sales growth were more than offset by higher cost of sales and operating expenses.

Revenues at $1.43 billion surpassed the consensus estimate of $1.37 billion. On an adjusted basis, the company’s net sales increased 6.1% year-over-year (or 6.3% on a reported basis). Organic sales in the quarter grew 5.4% from the year-ago quarter. Acquisitions had a positive impact of 1%, and forex woes left an adverse impact of 0.1% on the top line.

Tangible product sales in the quarter increased 4.7% year-over-year, while sales from services and software were up 16%.

The Asset Intelligence & Tracking (AIT) segment’s net sales in the quarter were $394 million, down 8.2% from the year-ago quarter. On the contrary, net sales of the Enterprise Visibility & Mobility (EVM) segment at $1,038 million reflected an increase of 12.7%.

The cost of sales in the quarter increased 14.9% to $795 million. Gross profit (adjusted) was down 3.3% year-over-year to $638 million, while the margin at 44.6% reflected a decline of 430 basis points (bps) year-over-year.

Total operating expenses were $425 million, up 11% from the year-ago quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $285 million in the quarter, down 16.4% from the year-ago quarter. Also, the adjusted EBITDA margin declined 540 bps to 19.9%.

Balance Sheet and Cash Flow

Exiting the first quarter, Zebra had cash and cash equivalents of $141 million, down 57.5% from the end of 2021. Its long-term debt was at $913 million, roughly 1% below the 2021-level.

In the quarter, the company’s net cash flow from operating activities was $54 million, down 75.9% from the year-ago quarter. However, capital spent on purchasing property, plants, and equipment in the quarter at $14 million increased 40% year-over-year. Free cash flow in the quarter was $40 million versus $214 million in the year-ago quarter.

Projections

Zebra anticipates adjusted net sales growth (year-over-year) to be within the 3%-7% range in the second quarter of 2022.

Adjusted earnings are expected between $4.05 and $4.35 per share in the quarter. Costs related to the supply chain are expected to be $60 million, and the EBITDA margin (adjusted) is predicted to be 20%-21%.

For 2022, the company anticipates net sales to grow 3%-7% year-over-year. The combined impacts of acquisitions and foreign currency translations are predicted to hurt the top line by 50 bps.

The EBITDA margin (adjusted) is expected to be 22%-23%, down from the previous expectation of 23%-24%. The supply-chain-related cost headwinds are predicted to be $200 million, higher than the prior expectation of $140-$160 million.

Management Comments

The CEO of Zebra, Anders Gustafsson, said, “We continue to invest in our vibrant business and are excited about our proposed acquisition of Matrox Imaging which will create a comprehensive portfolio of machine vision solutions to address the increased needs of manufacturers.”

For investors’ interest, Zebra announced its intention to buy Matrox Electronic Systems Ltd. in March 2022. The buyout is expected to conclude this year.

Capital Deployment

In the first quarter of 2022, Zebra used $25 million for the repayment of long-term debts and $305 million for the repurchase of common stock.

Stock Rating

On May 3, an analyst with CFRA reiterated a Hold rating on Zebra while lowering the price target to $513 (39.35% upside potential) from $580.

Overall, the company has a Strong Buy consensus rating based on seven Buys and two Holds. Zebra’s average price forecast of $533.67 mirrors 44.96% upside potential from current levels.

Over the past year, shares of Zebra have declined 21.8%.

Bloggers’ Stance

According to the TipRanks data, the financial blogger opinions are 100% Bullish on ZBRA versus the sector average of 68%.

Conclusion

A solid backlog, pipeline of projects, and expected synergies from the Matrox buyout (after its completion) will likely be advantageous for Zebra. However, headwinds emanating from high freight and supply-chain costs are near-term hurdles that the company has to deal with efficiently.

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