Why the global supply chain disruption is a tailwind for Zebra Technologies
TLDR:
  • Pandemic-induced supply chain disruption as a tailwind to supply chain optimization -> $ZBRA transforms industries by increasing efficiency per employee
  • Technology leader with a sticky ecosystem of hardware + software + data analytics
  • Capable capital allocators (organic investment, inorganic investment, opportunistic buybacks, high ROIC)
  • Reasonable valuation

Transforming Industries
The last years were turbulent and I believe Zebra will be a long-term beneficiary of these trends:
US inventories have gone through a sharp crash followed by rapid increase and overcapacity. Many companies got burned, especially retailers. Management teams are in disarray and change needs to happen!
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Warehouse and retail companies face high employee turnover and low average tenures. To combat this Zebra offers handheld solutions that increase employee efficiency, helping offset these downsides and streamlining operations. Zebra also operates in many other industries, as you can see below. Many industries are ripe for productivity investments.

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According to a study, 96% of retailers are investing in technology to improve operations(picture below). Another study suggests that the Supply Chain Management Market is expected to grow at a 9.4% CAGR to $45 billion in 2027. Zebra Technologies enjoys large tailwinds from this structural shift in global operations in most industries.

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Technological innovation
Zebra is a leader in most of these areas and keeps innovating.

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Zebra innovates in two ways:
  • 10% of sales are reinvested into R&D to offer a larger variety of solutions to customers
  • Zebra acquires companies in adjacent industries to add solutions to its portfolio that will help its customers, upselling existing customers to further improve their innovations. The company is a disciplined capital allocator and has successfully added these bolt-on acquisitions. They also are an angel investor to build relationships with companies to potentially acquire at a later date, drastically reducing execution risk, because they know the company well at the time of acquisition.

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I personally experienced this increase in productivity this year at Wacken Open Air, where Cashless payments were introduced via an RFID chip in the festival wristband. This eliminated drunk people counting coins to pay for their 10th beer of the night, instead just holding their wristband against a scanner, massively increasing sales speeds. RFID is a particularly interesting market, projected to grow 12% CAGR to $35 billion in 2030. It's still a small segment for Zebra, but growing "well in the double digits" according to the last call.

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Below is a look at the vast portfolio of services and solutions Zebra offers in one interconnected ecosystem. I believe that the company's 5-7% organic sales growth figure is conservative. I rather see management underpromising and overdelivering than the other way around.

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I see a large margin and growth opportunity in software and data analytics, where the company is investing heavily. Currently, 80% of sales are hardware, with software making the hardware more sticky. Below is a quote from the CEO in Q2 21:

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Capital Allocation and Valuation
Capital Allocation should be a vital part of any investment thesis, Zebra has three main ways to allocate cash (in order of importance):
  • Invest into organic growth (R&D/sales = 10%)
  • Invest into inorganic growth (acquisition strategy mentioned above)
  • Buyback shares at opportunistic prices, if there is no better use of cash. In the past 4 years, Zebra used ~1/3 of cumulative FreeCashFlow to buy back shares in opportunistic times: During the covid crash and after the valuation declined from the historical overvaluation of 35x forward PE back to good levels of 15 PE and 5% FCF yield
  • This resulted in high average ROIC of 12.5% in the last decade, rising
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Valuation: Like I just mentioned, Zebra was highly overvalued in the 2020/2021 tech craze. Forward PE expanded to 35+ but finally came down back down under the historical median after a 53% drawdown. The FCF yield should be higher if we subtract settlement payments to Honeywell for a lawsuit that has been settled with a $360 million payment from Zebra. These 8 quarterly payments will impact FCF, but they are irrelevant long-term. Zebra also currently is impacted by high supply chain costs due to shipping prices, estimating a $200 million FY22 impact. If we adjust the $150m settlement plus $200 million supply chain impacts we get a 5.8% EV/FCF yield, significantly above the median 4.3% yield.

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$ZBRA is a 5% position and I added $500 for this challenge

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Questions? Share them in the comments and leave a like
Heavy Moat Investments's avatar
I could have added a lot more if there wasn't a limit of 750 words for the competition. I cover Zebra Technologies on Seeking Alpha as well, so here are my two articles about the company if you want to dive in further:


Edmund Simms's avatar
Interesting business! Hadn't heard of them before. Two questions:
1) What is RFID? Can you explain to a non-techy like me?
2) Who are their main competitors? Is there something they do better than them?
Heavy Moat Investments's avatar
@valuabl 1) RFID = Radio-frequency identification, basically a way to scan data. One example is the festival wristband I posted. It's the same technology that credit cards use most of the time. The technology is getting used in a lot of new situations now, like event identification. It has some advantages over barcodes (which is the larger part of Zebras business, so in a way they are cannibalizing themselves), it is a lot more flexible and has more use cases. You can track a package better with an RFID tag than with just barcodes. The disadvantage is that RFID is A LOT more expensive, so it doesn't really work for cheap articles in large quantities. It might very well be worth it though to track for example new iPhones with RFID chips, doubt the $10-20 for an active RFID chip makes that much of a difference if you secure a $1000+ item. (passive RFID is a lot cheaper). That was a much longer explanation than I planned to write, but I hope its understandable :D

2) Regarding competition, the main competitor is Honeywell, competing in a number of segments. The markets are still fragmented though, with many smaller players. One of the biggest advantages is Zebras focus on these products, while Honeywell is a large conglomerate. Zebra also is focusing more and more on software & data analytics to enhance the experience they can provide with their hardware. This increases the value proposition. Furthermore the breadth of its offering make it attractive as a provider for all needs, rather than employing products from a douzen point solutions.

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Ben's avatar
Great write up. Chef kiss to that chart on capital allocation
Heavy Moat Investments's avatar
@rpinvestments Thank you! Indeed the best buyback chart I've seen to date.
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Leandro's avatar
Great write up my friend! Given how concentrated ecommerce sales are, do you think Zebra is at risk of being disintermediated in this segment? Amazon just bought its own robotics company and I took it a sign they might try to do these things in house

Thanks!
Heavy Moat Investments's avatar
@invesquotes Thank you Leandro! I would've loved to put a higher emphasis on risks as well, but the word count really limited me here :D

I agree, Amazon is a risk given that they have hundreds of million of square feet in warehouse space. They are currently one of the largest customers and I expect them to keep buying Zebra gear. Amazon is investing in its own Robotics infrastructure in its warehouses, but at the end of the day Amazons goal is to reduce workers per warehouse and increase the efficiency per worker. Besides replacing workers with robots a fast and scalable way to improve is to improve efficiency with Zebras handheld devices.
Fulfilment also is a large burden on Amazon and here Zebra also has great solutions. Check out its Smartpack Trailer solution, which uses machine vision to analyse and optimize delivery truck space for example. Especially with the data analytics aspect and the growing importance of this segment I believe that Zebra can develop something that even Amazon won't want to develop in house.
Conor Mac's avatar
I knew this was coming, and you did not disappoint, well done man!

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Heavy Moat Investments's avatar
@investmenttalk Thank you. Let's see if the judges think so as well ^^ Wonderful company
Josh Kohn-Lindquist's avatar
Forgot about $ZBRA, got it back on my watchlist now.

Great writing Stock Metal 👍

Would you consider them a successful serial acquirer similar to $CNSWF, $TDG, and $ROP or is it too early to tell?

Really like the idea of them snapping up niche adjacencies around their core offerings.
Ben's avatar
@joryko I would say yes since their acquisition of Motorola data analytics 5 years ago. Before they just sold hardware. But the bottom line and stock really took off when they bet big on data
Heavy Moat Investments's avatar
@joryko thanks for the question. They've definitely been successful with their acquisitions. The Motorola one was transformational, like @ben said. Especially branching into adjacent niches makes these acquisitions a lot better than as a standalone company. Long standing relationships with their customers help a lot. It's hard for me to compare them to pure serial acquisition companies like $CNSWF and Lifco (I don't know enough about Roper and Transdigm yet!). They do opperate in similar ways. With Zebra I especially appreciate their nuanced take on acquisitions, with their frequent angel investments. That leaves them paying more for the acquisition later on, but it reduces the risk a lot, because you already know the company well and can better judge if its a good culture fit or not.
Josh Kohn-Lindquist's avatar
@stonkmetal Very interesting -- thank you for the response 🙏

The angel investments are particularly intriguing and a cool strategy for considering over the long term.

Looking forward to opening a starter position.
Heavy Moat Investments's avatar
@joryko Happy to hear that. My DMs are always open if you wanna discuss more about it or other ideas :)
Sagar Vensi's avatar
Thanks for this, I got to learn something new.
Heavy Moat Investments's avatar
@stockado Happy to hear that! Have you been following Zebra before or are you new to the company?

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