Here's Why Netgear Is Still a Buy
Netgear reported its fourth-quarter and full-year 2012 results on Tuesday, and boy did things get ugly.
Net revenue for the year was $1.27 billion, up 7.7% from $1.18 billion in 2011. Though revenue beat expectations, shares of Netgear fell as much as 12% yesterday as it missed estimates for earnings per share. Sure enough, margins fell across the board and non-GAAP diluted EPS came in at $0.55 per share in the fourth quarter, compared with $0.69 per share in the year-ago period.
The tax man cometh
So what happened?
Uncle Sam, for one. According to the company's press release, numbers took a hit because of a shift in revenue and profits to the Americas, where tax rates are higher. Sure enough, Netgear's non-GAAP tax rate was 39.4% in the fourth quarter 2012, compared to 30.5% in the fourth quarter of 2011.
In addition, Netgear's retail segment grew 7% year over year and continued to take market share from competitors like Taiwan-based D-Link and Cisco's (soon to be Belkin's) Linksys brand. However, its commercial business unit shrunk 12% from the same period in 2011 with Netgear placing the blame on fiscal cliff uncertainties in the U.S. and continued weakness in Europe. Even so, Netgear expects its commercial segment to grow in 2013 as it expands further into emerging markets and businesses in established markets eventually loosen their purse strings.
A new market
Management also expressed excitement for last week's announcement of Netgear's agreement to acquire Sierra Wireless' AirCard business for $138 million in cash and $6.5 million in assumed liabilities. Netgear ended the fourth quarter with $376.9 million in cash, so its financial outlay for the acquisition should be more than manageable. Sierra, for its part, was happy to take the cash, preferring instead to improve its machine-to-machine and connected device markets.
According to Netgear CEO Patrick Lo, the acquisition should help position his company to take advantage of a "brand new 4G LTE fixed mobile data, voice, and media gateway market, which is expected to grow from less than $100 million last year to over $1.5 billion in five years." Should this new market materialize as planned, it'll go a long way toward helping Netgear recoup its investment and meet management's reiterated goal of increasing revenue to $2 billion by the end of 2014.
For those of you keeping track, that would represent a whopping 57.5% increase from Netgear's full-year 2012 revenue of $1.27 billion. If Netgear can grow revenue at this torrid pace while eventually bringing its healthy operating margin back to stated goals in the range of 11% to 12%, investors can safely expect the stock price to follow suit.
In the meantime, Netgear needs to show investors it can deliver the revenue growth investors are being promised. That shouldn't be a problem if they can continue to streamline operations and successfully integrate the Sierra Wireless business soon, but Mr. Market is notoriously impatient and hates being told to hurry up and wait. As a result, long-term investors might just find today's pullback is the perfect opportunity to open a new position.
2013 and beyond
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The article Here's Why Netgear Is Still a Buy originally appeared on Fool.com.Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Netgear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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