Stableboy Selections (a blog I should read more often) provides us with a fairly simple case for shorting Logitech. After joking about their domicile (Apples Switzerland) he points out the obvious – laptops are replacing desktops – pads and phones are replacing both of them. Logitech sells peripherals. The new technology (along with things like Google speak-to-search) will reduce the need for peripherals. Peripheral sales should fall year-in-year-out – they have done so at Logitech.
Eventually this suggests Logitech will look like Radio Shack – a company that got rich selling cables for your computer and TV and eventually shrunk into (near) oblivion. The first of two bottoms (in the stock at least) was marked by The Onion doing a mock interview where the CEO could not figure out why they were still in business.
If the desktop is doomed so are its peripherals – and along with my absurd collection of cables (firewire anyone) I now have a collection of mice, keyboards, video-cams and the like. My shop is my attic.
Given Logitech trades at a trailing PE of 22 it looks like an attractive valuation-business obsolescence short.
Alas if this business were as easy as ripping off other people’s ideas we would all be rich. So I went to work reading Logitech‘s accounts. There are some upsides – first and foremost is Google TV (“the most important product launch in our history”). I am not sure Google TV is getting much traction (but they have a really complex remote control to sell and even that will become another Android app). More notably they had a really good quarter – enough of a good quarter that it spelled “turnaround”. Just as The Onion marked a bottom in Radioshack I was worried that Stableboy would mark a (the?) bottom in Logitech.
I just could not work out why peripherals would have a good quarter. And if it was a good quarter I could not figure any reason why sales should start motoring upward. The trend towards lower peripherals sales plain – and the company’s contrary prediction is strange. However the company does predict turnaround.
My first reaction was that the company was channel-stuffing. (Increasing the speed at which you deliver to just-in-time retail can produce sharply rising sales at the expense of annoying your customers and sharply falling sales next quarter.) Channel-stuffing would have been a great short thesis (and Stableboy hints at it) but it does not look supported by the data. Days receivable rose – but only in proportion to sales. (They rose from $260 to $305 million – both 47 days.)
Inventory turns dropped (why I do not understand). But what really jumped out at me was that payables rose to 90 days from 71 days. This company was not paying its suppliers. 90 days outstanding almost destroyed David’s Holdings (as per my last blog post). Its a pretty big tell – or so it seems to someone who is used to the 35 days of retailers.
But alas 90 days is not so startling. Apple is at 80 days at the end of year (and has been higher). Dell is at 81. And the disease is widespread – for instance the Japanese optical companies (Canon, Nikon) are at 80-90 days.
Dell is particularly instructive. The company collects its cash in advance from customers and runs on negative working capital. The business has always been funded by borrowing from suppliers. Its just that the scale of the loan has increased with monotonous regularity. Days payable outstanding was 56.1 days a decade ago – then 66.9, 69.4, 71.3, 73.4, 74.8, 77.1, 80.1, 71.8 and 81.2 days. Dell just screws its suppliers a little bit more every year. It shows more cash generation than is real. It makes itself look better than it actually is.
Dell however is a declining business. Apple which is clearly not declining does it too.
Ultimately this is bad business practice. It stresses suppliers – it costs them money chasing you up. It builds distrust. Yet Apple does it – and the reason is obvious. Because it can. Apple has power and it is not afraid to (ab)use that power.
By contrast Cisco (a company which tries to keep its supply chain sweet after an infamous supply chain stuff up) is under 20 days.
Macroeconomic conditions in China
This leads me to the real point of this post. The macroeconomic conditions in China are changing dramatically. labour shortages are a serious problem. We are beginning to see press stories about difficulties in getting things produced and companies bringing production back to the USA. What this presages is a change in power between the Western giants and their Chinese manufacturers. Apple behaves badly because it can – but that power probably does not exist in the long run for Dell or Logitech and the loans that these companies have taken from their suppliers (loans that are a meaningful part of their cash balance in some cases) are going to have to be repaid.
It is logical when you think about it. Inflation in the US is 1 per cent plus or minus 2 per cent. Its probably over 10 per cent in China. Slow payment thus benefits the Americans relatively little but costs the Chinese counterpart a lot. Chinese inflation and labour shortages should cause supply chains to speed up.
Cisco, Samsung and other companies that have kept the supply chain sweet should be fine. Apple should be fine too – its bills to suppliers are trivial compared to cash balances or profits.
But hey – we did short some Logitech. It really is not so good for them. 90 days really is a problem – even if they don’t know it yet. Their business practice stinks and it will come back and bite them. And it will bite many other companies too.
(All days payable numbers sourced from Factset.)
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