Netgear (NTGR)

Report
Netgear (NTGR)
Bharath Chandrashekhar
Daniel Kleeman
Shalini Sivarajah
Presented: April 10, 2014
Agenda
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Company Profile
Business Model
SWOT Analysis
Macroeconomic Overview
Stock Performance
Porter’s Analysis
Comps Analysis
Financial Analysis
Valuation
Recommendation
Company Profile
• Netgear is a global networking company, engaged in providing a
range of networking products to consumers, businesses and service
providers
• The company operates in US, EMEA (Europe, Middle-East and
Africa) and Asia
• Incorporated: January 1996
• HQ: San Jose, CA
• IPO: July 2003, raised $98m
• Market Cap: $1.2bn
• Current Share Price(4/8/14): $33.45
Business Model
• Outsource manufacturing, warehousing and distribution
• Focus mainly on sales & marketing and R&D
• Distribution is mainly through traditional retailers, online retailers,
wholesale distributors, DMR and VARs
• Three business segments:
▫ Retail
▫ Commercial
▫ Service Provider
• Little to no debt
• 150 issued United States and 80 foreign patents that expire between
2014 and 2030
• Approximately 125 pending United States and foreign patent
applications
Business Segmentation
Business Segments
Retail
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WiFi Internet Routers
WiFi Network Adapters
WiFi Range Extenders
Network Powerline
Products
Home Monitoring
Cameras
Multimedia Streaming
Devices
Home Use Network
Storage
Switches and Access
Points
Mobile Broadband
Routers
DSL and Cable Gateways
Commercial
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Unified Network Storage
Systems
WiFi Networking
Products
Network Management
Tools
Network Security
Service Provider
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Mobile Broadband
Devices
WiFi Routers
DOCSIS 3.0 Gateways
xDSL and Fiber Gateways
Powerline and MoCA
Adapters
WiFi Adapters
Storage
Switches
Home Security
Network Security
Retail
Networking Retail Share
Source: Analyst Day 2013
Presentation
Wifi Range Extender
DSL Modem Router
USB Mini Adapter
Wifi Router
Commercial
Switches
Backup Storage
Wifi Networking
Router
Service Provider
Business Segments
$600,000
25.00%
22.00%
$500,000
20.00%
21.40%
$400,000
17.20%
15.00%
14.40%
$300,000
9.40%
10.00%
8.90%
$200,000
5.00%
$100,000
$-
0.00%
Retail
2012 Net Revenue
Commercial
2013 Net Revenue
2012 Contribution Margin
Service Provider
2013 Contribution Margin
Geographic Segments
Revenue Breakdown
2012
2013
12.20%
10.60%
36.00%
53.40%
30.10%
Americas
57.70%
EMEA
APAC
SWOT Analysis
STRENGTHS
WEAKNESSES
-Continuous R&D focus
-Low debt
-Exposed to Foreign Exchange Rate
Risk
-Increased cost of production in
China
SWOT
Analysis
OPPORTUNITIES
THREATS
-EMEA after consolidation (one of
the best distribution networks in
Europe)
-Aircard acquisition implementation
-New Technology by competitors
-Imports from China
Macroeconomic Overview
• Key Drivers
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Demand from wired Telecommunications operators
Number of broadband connections
Corporate profit
Aggregate private investments- expected to increase by 5.1% in the
above period
Stock Performance
NASD
NTGR
Source: Yahoo Finance
14
Porter’s 5 Forces
Bargaining
Power of
Buyers
HIGH
Threat of New
Entrants
MEDIUM
Bargaining
Power of
Suppliers
Industry
Landscape
/Competition
MEDIUMHIGH
MEDIUM
Threat of
Substitutes
LOW
Competitive Space
Comparable Companies
NetGear (NASDAQ:NTGR)
Benchmarking Analysis – Financial Statistics and Ratios, Page 2
($ in millions, except per share data)
Return on Investment
LTM Leverage Ratios
ROIC
(%)
ROE
(%)
ROA
(%)
Debt /
Tot. Cap.
(%)
Debt / Net Debt /
EBITDA
EBITDA
(x)
(x)
LTM Coverage Ratios
EBITDA / EBITDA
EBIT /
Int. Exp. - Cpx/ Int. Int. Exp.
(x)
(x)
(x)
Company
Ticker
NetGear
NTGR
15%
7%
5%
1%
0.1x
-1.1x
0.0x
0.0x
0.0x
ASUSTeK
Cisco
D-Link
ASUS
CSCO
DLINK
42%
53%
11%
18%
62%
11%
7%
10%
3%
6%
44%
12%
0.3x
1.0x
1.5x
-3.1x
0.4x
-4.1x
63.6x
23.2x
9.5x
57.0x
21.2x
6.3x
56.3x
19.2x
6.3x
35%
47%
30%
21%
7%
10%
21%
3%
0.92
0.17
-2.28
-0.95
32.11
43.41
28.19
39.12
27.26
37.74
Mean
Median
Valuation – Comparable Companies
NetGear (NASDAQ:NTGR)
Comparable Companies Analysis
($ in millions, except per share data)
Enterprise Value /
Company
Weight
NetGear
ASUSTeK
Cisco
D-Link
30%
30%
40%
Ticker
Equity
Value
Enterprise
Value
NTGR
Company
NTGR
Company
NTGR
LTM
Sales
LTM
EBITDA
LTM
EBIT
Total
EBITDA Debt /
Margin EBITDA
Price /
LTM
EPS
NTGR
$1,301
$1,164
0.8x
9.3x
12.5x
9%
0.1.x
23.2x
ASUS
CSCO
DLINK
$7,805
123,417
434
$5,937
129,036
383
0.4x
2.7x
0.4x
8.0x
9.5x
19.2x
9.0x
11.5x
28.9x
5%
28%
2%
0.3.x
1.0.x
1.5.x
11.0x
12.4x
19.6x
1.1x
0.4x
1.1x
12.2x
9.5x
12.9x
16.5x
11.5x
17.7x
12%
5%
0.9x
1.0x
14.3x
12.4x
14.8x
Mean
Median
Weighted
Company
LTM
P/E
14.8x
EPS
Stock Price
1.44 $
EV/EBITDA EBITDA
12.9x
EV/EBIT
17.7x
125.84 $
EBIT
92.98 $
21.32
EV
1,627.48
EV
1,649.22
MVE
Stock Price
$ 1,764.19 $
MVE
45.37
Stock Price
$ 1,785.93 $
45.93
Financial Analysis
Current Ratio
Quick Ratio
Cash Ratio
Liquidity Ratios
2009 2010
2.73
2.62
2.27
2.12
0.88
0.50
2011
2.70
2.17
0.68
Profitability Ratios
2009 2010 2011
Operating Profit Margin 4.74% 10.11% 10.52%
Net Margin
1.36% 5.64% 7.74%
ROA
1.47% 6.52% 9.41%
ROE (Book Value)
2.25% 10.17% 14.30%
2012 2013
3.31 2.67
2.64 1.92
0.57 0.48
2012
10.16%
6.80%
8.36%
11.47%
2013
6.79%
4.03%
5.05%
7.14%
A/R Turnover
Days Sales Outstanding
Inventory Turnover
Fixed Asset Turnover
Total Asset Turnover
Activity Ratios
2009
2010
4.22
3.98
86.57
91.74
7.58
7.08
6.39
6.23
1.08
1.16
2011
4.52
80.76
7.21
6.58
1.22
2012
4.97
73.47
7.27
6.56
1.23
2013
5.14
71.02
6.10
5.44
1.25
DuPont Analysis
2009
2010
2011
2012
2013
Tax Burden
28.66% 55.81% 73.56% 66.94% 59.38%
Interest Burden
100.00% 100.00% 100.00% 100.00% 100.00%
Operating Profit Margin
4.74% 10.11% 10.52% 10.16% 6.79%
Asset Turnover
1.08
1.16
1.22
1.23
1.25
Leverage
1.53
1.56
1.52
1.37
1.41
ROE
2.25% 10.17% 14.30% 11.47% 7.14%
Business Performance
Share of Revenue By Segment
100%
90%
27.37%
20.18%
80%
31.14%
36.10%
40.04%
70%
60%
31.54%
30.58%
28.06%
50%
24.21%
22.73%
40%
30%
20%
42.05%
48.28%
40.79%
39.69%
37.23%
2011
2012
2013
10%
0%
2009
2010
Retail
Commercial
Service
Annual Growth Rate by Segment
2010
2011
2012
Retail
50.83% 10.63%
4.77%
Commercial
35.53% 16.48%
-7.09%
Service
-3.13% 102.05% 24.85%
Total Revenue
31.38% 30.93%
7.70%
2013
1.02%
1.08%
19.44%
7.68%
Revenue Analysis
($ in thousands)
Retail
as a % of Total Revenue
growth rate
2014
535,420.2
Revenue Assumptions
2015
2016
2017
567,545.4
578,896.3
613,630.1
2018
656,584.2
34.59%
34.09%
33.91%
32.01%
30.87%
5.00%
6.00%
2.00%
6.00%
7.00%
Commercial
as a % of Total Revenue
growth rate
326,824.1
343,165.3
336,301.9
353,117.0
377,835.2
21.12%
20.61%
19.70%
18.42%
17.76%
5.00%
5.00%
-2.00%
5.00%
7.00%
Service
as a % of Total Revenue
growth rate
685,560.0
754,116.0
791,821.8
950,186.2
1,092,714.1
44.29%
45.30%
46.39%
49.57%
51.37%
25.00%
10.00%
5.00%
20.00%
15.00%
1,547,804.3
1,664,826.7
1,707,020.1
1,916,933.3
2,127,133.5
13.01%
7.56%
2.53%
12.30%
10.97%
Total Net Revenue
growth rate
Valuation – Discount Rate
Weighted Average Cost of Capital
Share Price
$ 34.04
Fully Diluted Shares Outstanding
38,885
Market Value of Equity
1,323,653
CAPM
Risk-Free Rate
Market Risk Premium
5-Year Beta
3.50%
5.00%
2.23
Total Debt
CAPM Cost of Equity
14.63%
Weight of Equity
Weight of Debt
100.00%
0.00%
Cost of Debt
Size weighted interest rate
CAPM Cost of Equity
NTGR Realized Return - 5 year
Cost of Equity
0.00%
14.63% 40.00%
11.69% 60.00%
12.86%
Tax Rate
40.00%
WACC
12.86%
Discount Rate
WACC
Business Risk Premium
Discount Rate
12.86%
1.50%
14.36%
Valuation – DCF
NTGR Discounted Cash Flow Analysis
2014
2015
2016
Net Income
60,179 89,701 88,820
Plus: Depreciation
34,497 36,049 38,212
Less: Capital Expenditures
(21,299) (23,429) (24,366)
Changes in Net Working Capital
Less: Increases in A/R
(35,338) (47,792) (34,466)
Less: Increases in Inventory
(23,193) 14,573 (22,977)
Plus: Increases in A/P
17,032 (15,025) 37,094
Free Cash Flow
31,878 54,077 82,316
Present Value
27,875 41,347 55,035
as a % of value
4.11%
6.10%
8.12%
Discount Rate
Terminal Growth Rate
14.36%
3.00%
Enterprise Value
Less: Debt
Market Capitalization
678,035
678,035
Share Price
$
17.44
$ 17.44
2.6%
2.8%
3.0%
3.2%
3.4%
2017
2018
Terminal
77,555 86,060
39,740 41,727
(29,239) (33,625)
(56,815) (5,803)
(31,487) (10,259)
9,308 28,503
9,062 106,603
5,298 54,494
0.78%
8.04%
Sensitivity Analysis
13.0% 13.5% 14.0% 14.5%
$ 19.59 $ 18.55 $ 17.59 $ 16.73
$ 19.91 $ 18.83 $ 17.85 $ 16.96
$ 20.24 $ 19.12 $ 18.11 $ 17.19
$ 20.58 $ 19.43 $ 18.39 $ 17.44
$ 20.94 $ 19.75 $ 18.67 $ 17.69
966,346
493,987
72.86%
15.0%
$ 15.93
$ 16.14
$ 16.35
$ 16.57
$ 16.80
Recommendation
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Current Price – $34.04
DCF Value – $17.44
Comps Value – $20.54 - $34.34
Recommendation: No change, keep on watch list

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