Tech Data Misses 3Q Estimates

Information technology (IT) products distributor, Tech Data Corp. (TECD - Analyst Report) reported third quarter 2012 earnings of $1.26 per share that missed the Zacks Consensus Estimate by a penny. However, earnings per share (EPS) increased 17.8% year over year, primarily driven by strong top-line growth and aggressive share buyback activity during the quarter.

Operating Performance

Gross profit increased 6.3% year over year to $344.7 million. Gross margin of 5.2% remained flat on a year-over-year basis.

Selling, general & administrative (SG&A) expenses in the reported quarter were $255.2 million, up 5.0% year over year. This yearly increase was primarily led by higher costs to support growth and the impact of stronger foreign currencies.

Overall, operating income increased 10.6% year over year to $89.6 million from $81.0 million posted in the year-ago quarter. Operating margin was 1.36% compared with 1.31% reported in the year-ago quarter.

Geographically, operating income in the Americas was $52.6 million versus $46.1 million in the year-ago quarter. Operating margin in the region was 1.89% compared with 1.71% reported in the year-ago quarter. Operating income in Europe was $39.7 million or 1.04% of net sales versus $37.1 million or 1.07% of net sales in the year-ago quarter.

Revenues

Total revenue in the reported quarter was $6.59 billion, up 7.0% from $6.16 billion in the year-ago quarter. The strengthening of certain foreign currencies against the greenback positively impacted the year-over-year net sales comparison by approximately 3.0%. However, revenues fell shy of the Zacks Consensus Estimate of $6.75 billion.

Net sales in North America and Latin America (representing 42.0% of total sales) increased 3.0% to $2.78 billion, while net sales in Europe (representing 58.0% of total sales) climbed 10.0% to $3.81 billion.

Balance Sheet

At quarter end, the company had approximately $899.7 million in cash compared with $905.1 million in the previous quarter. Total debt at the end of the quarter was $473.1 million versus $487.1 million in the prior quarter.

Recommendation

Tech Data, which distributes products manufactured by Apple Inc. (AAPL - Analyst Report) and Hewlett-Packard Co. (HPQ - Analyst Report), expects flat to low single-digit sales growth in local currencies in both the U.S. and European regions.

We believe that strong organic revenue growth, increasing enterprise spending and an aggressive share repurchase policy will drive the stock over the long term.

However, we believe that Tech Data faces a number of headwinds in the near term, including a volatile European market, lack of visibility in government spending in the U.S. and the negative effects of the floods in Thailand, which is expected to hurt PC shipments in the first quarter of 2012. Tech Data derives approximately 15% - 20% of revenues from PC distribution. 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 #3 Rank, implying a short-term Hold rating.