SYNNEX Shares May Be Peaking; Raymond James Downgrades To Underperform

Raymond James’ Brian G. Alexander downgraded the rating for SYNNEX Corporation SNX from Market Perform to Underperform, ahead of the company’s F1Q earnings report scheduled for March 28. While there is limited upside to these earnings, the company’s cash flows and shares appear to be peaking.

Analyst Brian Alexander mentioned the reasons for there being limited upside to consensus EPS expectations:

1. F1Q guidance/F2Q consensus implies marginally better-than-seasonal revenue, despite results from competitors and a vendor suggesting weakness in North America in January
2. Operating margins are likely to contract in the first half of 2016, despite positive mix shifts and possible Concentrix improvement. Margins would be under pressure due to increased competition in key segments
3. Cash flow metrics have “almost certainly peaked and this generally correlates well to distributor share price momentum,”
4. May quarter EPS guidance has been below Street expectations for 4 of the past 5 years

Take On Shares

SYNNEX’s shares have gained 13 percent year-to-date and seem to be fully valued versus peers, “with an asymmetric return profile according to our sum of the parts analysis,” Alexander said.

Take On Cash Flows

“We note that there has been a strong correlation between SNX’s stock price and TTM FCF...We note FCF has been driven by a normalization of the cash conversion cycle from ~50 days in 2014 to ~44 days in 2015,” the analyst wrote. He added that there is unlikely to be any further improvement in 2016 and expects FCF to stabilize at around $250-$300 million in FY15.