We maintain a Neutral recommendation on Tech Data Corp. (TECD).
Tech Data’s second quarter 2011 results beat the Zacks Consensus Estimate and recorded the most profitable second quarter in the company’s history, attributable to an improving demand for technology products combined with an outstanding effort in working capital management.
With strong earnings momentum, diversified customer base, increased acquisition, diverse product portfolio, significant operating efficiency and share repurchases, we remain positive on the company’s long-term growth.
We believe Tech Data continues to benefit from an increase in internal investment, increased workforce and a higher spending on developing systems, which has driven growth.
However, the drag in worldwide IT spending, softness in demand, stemming from weakness in the European market, and a stronger U.S. dollar could negatively impact sales in the coming quarters. Intense competition and a weak industry pricing also remain areas of concern.
Moreover, operating cash flow deteriorated in the first half of fiscal 2011. During the same period, Tech Data generated $33.5 million of cash from operations versus $525.6 million generated in the comparable year-ago period.
Second Quarter Highlights
Tech Data announced encouraging results for the second quarter of fiscal 2011, exceeding the Zacks Consensus Estimate of 78 cents with a surprise of 5.1%. Net income in the reported quarter was $40.9 million, compared with $35.2 million in the year-ago quarter. Earnings per share were 82 cents, compared with 70 cents in the year-ago quarter.
Total revenue for the reported quarter was $5.47 billion, an increase of 5.3% from $5.18 billion in the prior-year quarter. This was above the Zacks Consensus Estimate of $5.45 billion.
North America and Latin America (representing 47% of total sales) reported a sales increase of 8.4% to $2.60 billion and European sales (representing 53% of total sales) upped 3.2% to $2.87 billion. The increase in net sales in both regions was attributable to a strengthening demand.
Most recently, Brightstar Europe (a joint venture between Tech Data and Brightstar) announced an agreement to acquire Triade Holding, a privately held portfolio of value added distributors of consumer electronics, mobility and IT products in Benelux and Denmark.
The transaction is expected to close in the third quarter of 2011. The transaction’s total enterprise value, including assumed debt, is estimated at €145 million (approximately $189 million). The deal will be accretive to fiscal year 2011 earnings and represents the joint venture’s first acquisition of such a significant size. To expand its geographical footprint, Tech Data acquired certain assets of Portuguese IT distributor, DLI (Distribuicao e Logistica para Informatica, S.A). The acquisition will expand Tech Data’s presence in Portugal. We remain positive on Tech Data’s acquisition spree.
Tech Data is one of the leading providers of information technology (IT) products, logistics management and other value-added services. It distributes consumer electronic products from leading hardware and software vendors such as Apple Inc. (AAPL), Panasonic Corp. (PC), Hewlett Packard Company (HPQ), Adobe Inc. (ADBE), Autodesk Inc. (ADSK) and Cisco Systems (CSCO).
Demand could remain under pressure in the second half of calendar year 2010 as global spending on technology will likely be lower-than-previously estimated, given the European debt crisis and the weakening of the euro against the dollar.
The shares trade at a premium to industry leader, Ingram Micro (IM). Thus, our long-term Neutral rating indicates that the stock would perform in line with the broader market. Currently, the stock has a Zacks #3 Rank, and a short-term Hold rating.
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