Zebra Is Deeply Undervalued; Shares Could Double By 2018, Says CLSA

The brokerage noted that the $3.5 billion acquisition of Motorola Solutions Inc MSI's enterprise business in October 2014 turned Zebra into a leading provider of automatic identification and data capture (AIDC), which is key to supply-chain and field-force automation in retail, logistics and manufacturing.

"We think Zebra is well positioned to benefit from some of the most powerful industry trends: automation, mobility and, eventually, the Internet of Things," analyst Jeremie Capron wrote in a note.

Although higher-than-expected IT integration costs led the shares down, the analyst said the costs are under control with "compelling" merger synergies. Capron also pointed out the share gains of Zebra in printing and mobile computing.

That said, the analyst noted that the company's near-term outlook remains challenging, with sluggish end-markets and forex headwinds (euro and sterling) leaving full-year earnings guidance at risk.

Related Link: Vetr Crowd Says Zebra Technologies Could Return More Than 25%

"However, we believe margins have bottomed and free cash flow is set to surge from -US$11 million last year to US$257 million this year and US$364 million in 2018, enabling a deleveraging from 4.7x Ebitda to under 3x over the next two years," Capron highlighted.

The analyst expects EPS of $5.10 on revenue of $3.59 billion for 2016 and $6.36 on revenue of $3.68 billion for 2017.

Noting that the shares could double by 2018, Capron initiated the coverage of the stock with a Buy rating and $74 price target as the shares are trading on 9x one-year forward adjusted EPS with a 10 percent plus free-cash flow yield.

Shares of Zebra closed Wednesday's trading at $55.89.

Full ratings data available on Benzinga Pro.