Tech Data: Small Margins, Big Profits

• Price: $47.21
• Forward P/E: 8.5
• Earnings Growth: 17.4%
• Projected Sales Growth: 10.1
• Market Cap: $2.0 billion

Why It's Featured: More products, better global reach, almost $1 billion in cash, ever increasing earnings.
Watch Out For: Operating and profit margins. Tech Data Corporation TECD distributes information technology products, as well as offers logistics management and other value-added services in North America, South America, and Europe. It distributes and markets approximately 150,000 products, including computer hardware, networking equipment, software, computer peripherals, physical security, consumer electronics, digital signage, and mobility hardware. The company also provides a range of services, such as training and technical support, customized shipping documents, product configuration/integration, and access to flexible financing programs, as well as a suite of electronic commerce tools comprising Internet order entry and EDI services. It serves approximately 125,000 value added resellers, direct marketers, retailers, and corporate resellers. Tech Data distributes for more than 500 vendors including Hewlett-Packard, Apple, Compaq, Cisco, Epson, IBM, Intel, Microsoft, NEC, and Seagate. (See this week's column on Seagate and its newly reinstated dividend at www.theonlineinvestor.com) The company was founded in 1974 and is based in Clearwater, Florida. A couple of things strike an investor while looking at Tech Data. First, earnings have increased in the last four years, going from $1.26 in 2006 to last year's $4.36. Remember how tough those same years were for most businesses? The second thing: operating and profit margins are razor thin. Operating margin for the last 12 months was 1.36% and Profit margin in the same time period was .87%. Not much room for error here. Having noted those interesting data points, upon further digging, there are even more. Return on equity is a respectable 11.39%. Revenues took a dip in 2009 to $22.1 billion from $24.08 billion, but bounced back last year to $24.376 billion. This year, 7 analysts have a consensus estimate for sales of $26.85 billion (up 10.1%), then see $27.62 billion next year (fiscal year ends January 31). As for earnings, 8 analysts predict $5.12, up 17.4%, this year, then see $5.55 next year. For the third quarter (ends in October), consensus is for $1.28, up from $1.07 in last year's third. For the final period, expect $1.73 vs. $1.63 in last year's fourth. The reason for the continued upward trends in sales and profits? There's a global increase in tech spending for Information Technology (IT) and high-end consumer electronics. Further, the company has been buying others, adding to their global reach as well as expanding their product list. One major new factor for better numbers: the introduction of cloud computing. It's accelerated the evolution of software and product requirements. To further help the bottom line, Tech Data focused on higher-margin customers, ones like small- and mid-sized businesses where discounting is less of a factor to write an order compared to larger, more courted companies. One more reason for expected better earnings per share: the company has an ongoing stock repurchase program, funded by almost $250 million in free cash flow and cash in the bank of $905 million. Tech Data has a confluence of positive factors that suggest solid earnings growth to at least 2015. They have new products and better geographic reach which continues to grow. They're also adding new vendors to represent more products. Additionally, with cloud computing and other technological advances in consumer products as well as data networking systems, businesses will need more of TECD's value-added services. Some analysts see $8 a share in earnings by mid-decade. Essential Numbers:

• Trailing P/E: 9.8
• Price to sales ratio: .08
• Price to book: .95
• Return on assets: 3.78%
• Revenues last 12 months: $26.06 billion
• Total Cash per share: $20.85
• Total debt: $487.13 million
• Total debt to equity: 22.59%
• Current ratio: 1.49
• Book value per share: $49.06
• Beta: 1.49
• 52-week change: 11.61%
• Total shares Outstanding: 43.4 million
• Float: 41.7 million
• Insiders own: 3.44%
• Institutions own: 94.3%
• There is no dividend.

This stock should appeal to investors that can tolerate some risk. With operating and profit margins so thin, there's little room for error before earnings feel the pain. On the other hand, there are plenty of new opportunities developing that will require TECD's products and services. With its global presence and strong vendor partners, TECD will be one of the companies that benefits from the new technology evolution. Company Web site: www.techdata.com Ted Allrich
October 13, 2011 Ted is the Chairman of the Board of B of I Holding and Bank of Internet USA. He is also the founder of The Online Investor (www.theonlineinvestor.com) which has a Free Newsletter for investors.