#WisdomWednesday No.5 and Why Share Buybacks Matter

A simple and underutilized investment idea

1 Key Investing Lesson - Cannibal Stocks

Cannibal stocks are stocks which are heavily buying back their own shares.

Investors generally like cannibal stocks simply because your ownership in the company increases without you doing anything.

Let’s consider this further:

Let’s say you own a company which has an EPS of $10. The company then decides to buy back 50% of outstanding shares. What happens to EPS then?

Well, it’ll increase from $10 to $20 which should increase the stock price considerably.

Simply, PE or EPS improve without any fundamental change to the business.

Companies also only tend to buy back their own shares when they believe their shares are undervalued. This often leads to a positive perception in the market and jumps in share prices.

It’s a fairly simple concept, right?

But let’s look at some companies which have been aggressively buying back their shares recently.

• TE Connectivity ($TEL) - $1.5B buyback

• Lululemon Athletica ($LULU) - $1B buyback

• Bristol-Myers Squibb ($BMY) - $3B buyback

• Mastercard ($MA) - $11B buyback

• Thermo Fisher Scientific ($TMO) - $4B buyback

• Aecom ($ACM) - $1B buyback

• Hilton Worldwide ($HLT) - $3B buyback

• Monster Beverage ($MNST) - $500M buyback

• MGM Resorts International ($MGM) - $2B buyback

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1 Investment Idea - Logitech International

Financials

Financially, there’s a lot to like about Logitech. Let’s look into the normal screening process that I like to do:

• Revenue growth > 6% - Logitech has a 5 year revenue growth of 9.52%.

• Earnings growth > 8% - Logitech has a 5 year earnings growth of 12.93%

• Inside ownership > 10% - Logitech has inside ownership of just 0.15%, though they have been buying back shares which is a positive sign.

• Gearing < 0.75 - Logitech has a gearing ratio of 2.59

• ROIC > 10% - Logitech has a ROIC of 43.65%

• FCF margin > 10% - Logitech has a FCF margin of 20.61%

Logitech are great at producing cash with $441M in free cash flow as at March 2023. However, the free cash flow do not seem to be as stable as I’d generally like to see.

Perhaps the best numbers I see are the capital efficiency numbers. As Warren Buffet says:

"In the end, what counts in investing is what you pay for a business through the purchase of a small piece of it in the stock market. And if you are going to buy small pieces of the best businesses in the world through time, you have to have some filter in your mind that tells you whether you are making sensible decisions. And that filter for us is return on equity, and return on invested capital."

Logitech capital efficiency numbers give us peace of mind that:

• Management allocate capital wisely

• That all capital is used productively

• That management have a long-term perspective

Non-financials

If the work from home, and flexible work environment continues to gain popularity (which it will), then Logitech is placed well to take advantage of further sales.

A hybrid working environment will lead to more demand for video collaboration equipment and the need for webcams, one of Logitech’s leading products.

Mordor Intelligence forecasts a 9% annual growth rate in the webcam market alone, whilst video conferencing is expected to grow at 19% until 2026.

I therefore believe there is a very sustainable revenue and earnings growth potential up until 2026.

Valuation

FCF yield is currently at 3.7%, compared to a 5-yr average of 4.58%.

P/E ratio is also currently at 26, compared to a 5-yr average of 21.42.

I don’t think there is enough margin of safety currently to make this a smart purchase. However, there’s no doubt that this is a quality stock that should be added to your waitlist.

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1 Graphic

You can learn a lot just by studying super investors like Bill Ackman.

Take a look at his portfolio above and see why he invested into all the above companies.

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1 In Depth Twitter (X) Thread

I recently wrote a great thread about Mohnish Pabrai, an investing legend!

Have a look at the thread here!

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1 Quote

“I look for companies that have a very high rate of return on capital - in the high 20% area. And I also look to see what their competitors are doing to reduce that return on capital. I want to find a business with a moat around it.” - Mohnish Pabrai

That’s it for the day

I hope you loved this article. As I develop on here, I’m sure there will be some changes to my structure and style, so please do leave some feedback for me.

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About the author

Make Money, Make Time is written by Oliver, a qualified CA, and investor who has read over 300 investment books, and spends more than 50 hours per week researching stocks so that you don’t have to. Let’s level-up together!