Tech Data Beats on Strong Sales

Information technology (IT) products distributor, Tech Data Corp. ( TECD - Analyst Report ) reported second quarter 2012 earnings of $1.10 per share, surpassing the Zacks Consensus Estimate by 15 cents.

Earnings per share (EPS) increased 34.1% year over year primarily driven by strong top-line growth and aggressive share buyback activity during the quarter.

Operating Performance

Gross profit increased 18.5% year over year to $340.8 million. Gross margin of 5.3% remained flat on a year-over-year basis.

Selling, General & Administrative (SG&A) expenses in the reported quarter were $262.1 million (4.1% of total sales) compared with $221.8 million (4.1% of total sales) in the year-ago quarter. On a dollar basis, SG&A expenses increased 18.2% year over year, primarily due to higher operating expenses arising from the acquisitions made in the previous year and a stronger euro.

Overall, operating income increased 19.8% year over year to $78.8 million from $65.8 million posted in the year-ago quarter. Operating margin, however, was 1.2% flat with the year-ago quarter.

Geographically, operating income in the Americas was $47.6 million versus $44.6 million in the year-ago quarter. Operating margin was 1.8% compared with 1.7% reported in the prior-year quarter.

Operating income in Europe was $33.9 million or 0.9% of net sales versus $23.8 million or 0.8% of net sales in the prior-year quarter.

Net income in the reported quarter was $50.1 million, up 22.5% year over year.

Revenues

Total revenue in the reported quarter was $6.45 billion, up 18.0% from $5.47 billion in the prior-year quarter. The strengthening of certain foreign currencies against the U.S. dollar positively impacted the year-over-year net sales comparison by approximately 9.0%.

Net sales in North America and Latin America (representing 41.9% of total sales) increased 4.0% to $2.70 billion while net sales in Europe (representing 58.1% of total sales) climbed 30.0% to $3.75 billion. The increase in net sales in both regions was due to strengthening demand.

Balance Sheet

At quarter end, the company had approximately $905.1 million in cash compared with $807.6 million in the previous quarter. Total debt at the end of the quarter was $487.1 million versus $483.3 million in the previous quarter.

During the second quarter of fiscal 2012, Tech Data repurchased approximately 3.2 million shares for $148.7 million under its current $200 million share repurchase program authorized earlier in the year. Tech Data announced a new share repurchase program that sanctions repurchase of an additional $100.0 million of stock going forward.

Outlook

Tech Data, which distributes products made by Apple Inc. ( AAPL - Analyst Report ) and Hewlett-Packard Co. ( HPQ - Analyst Report ) , expects continued year-over-year growth in both the U.S. and European regions. For the third quarter, Tech Data expects mid single-digits organic sales growth in both regions in local currencies on a year-over-year basis.

Tech Data expects year-over-year double-digit growth in operating income, net income and earnings per share for fiscal 2012. Tech Data also continues to expect that return on invested capital will be within the range of 14 to 16% for the fiscal year.

Tech Data believes that in this fiscal year the company will continue to make progress on its three-year operating margin target of exceeding 1.5% before stock compensation expense in fiscal 2013.

Recommendation

We expect the strong IT demand trend to continue to boost the company’s top-line growth going forward. Moreover, aggressive share repurchase will also drive earnings growth, in our view.

Although management expects year-over-year double-digit growth in operating income, net income and earnings per share for fiscal 2012, we remain cautious given the debt ridden European market, which may negatively impact a recovering information technology spending environment globally. Further, increasing competition, industry wide pricing pressure and narrow margins will remain headwinds for Tech Data going forward.

We, thus, maintain our long-term Neutral recommendation on the stock. Currently, the stock holds a Zacks #4 Rank, implying a short-term Sell rating.