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Ingram Micro (NYSE:IM) is a world leader in the wholesale distribution of computer products and related services with almost $30 billion in 2009 revenues. They serve more than 170,000 resellers in over 100 countries in North America, Europe, Asia/Pacific regions and Latin America.
IM recently reported better than expected results for their Q4 [ended Dec. 31, 2009] after also posting year-over-year gains in their third quarter. Estimates have been ramping upwards. Consensus estimates now see 2010 – 2011 EPS at $1.70 and $1.94 respectively.
This is especially good news as earnings from continuing operations had remained flat at $1.56 from 2006 through 2008 before declining in the first half of 2009. Here are the per share numbers for IM (excluding one-time items) as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
2001
169.01
1.10
0.32
12.53
44.3x
2002
148.96
1.15
0.49
10.85
29.2x
2003
148.81
1.33
0.81
12.33
15.4x
2004
160.40
1.38
1.01
14.12
16.2x
2005
177.43
1.91
1.50
15.02
11.6x
2006
185.10
1.93
1.56
17.24
12.2x
2007
202.65
1.97
1.56
19.82
12.8x
2008
212.99
2.07
1.56
16.46
10.2x
2009
175.94
1.73
1.34
17.95
11.6x
The 2005 - 2008 plateau in earnings contributed to the contraction in IM’s multiple from > 15x to about 11.6x – 12.8x over most of the period since 2005. I believe the renewed growth will lead to an expansion of their P/E looking forward.
Based on the consensus views for 2010 and 2011 Ingram now sells for only 10.6x this year’s and < 9.3x next year’s expectations. A rebound to even 13 times the 2010 estimate brings me to a 12-month target price of $22.10 or 23.1% above this afternoon’s quote.
Is that a crazy goal? No. IM shares actually changed hands at peak prices of $21.00 - $22.50 during each calendar year 2004 through 2007 – years when EPS ranged from $1.01 to $1.56 versus the $1.70 estimate for this year. Ingram shares traded north of $54 in 1998 at the height of the tech/internet bubble.
Zacks just put Ingram Micro on its Aggressive Growth buy list. Standard and Poor's gives IM a 4-Star rating (out of 5) and carries a 12-month target of $21. Morningstar sees ‘fair value’ as $23 share after processing the good December quarter results into their figures.
Summary:
Ingram’s nice earning surprise and low valuation make for a favorable risk/reward for buyers of IM shares. I see a 20% - 25% one-year move even if the P/E remains well below previous levels achieved when earnings were growing.
There doesn’t appear to be a lot of risk as the absolute low share prices in 2006 and 2007 were $16.50 and $17.80 when earnings were well below what are now projected for 2010.
Option savvy investors might consider this 6.6 month buy/write combination:
Cash Outlay
Cash Inflow
Buy 1000 IM @ $17.95 /share
$17,950
Sell 10 IM Sep. $20 calls @ $0.75 /share
$750
Sell 10 IM Sep $17.50 puts @ $1.25 /share
$1,250
Net Cash Out-of-Pocket
$15,950
If Ingram Micro rises to at least $20 (+ 11.5%) by Sep. 17, 2010:
· The $20 calls will be exercised.
· You will sell your shares for $20,000.
· The $17.50 puts will expire worthless.
· You will be left with no shares and $20,000 in cash.
· You will have no further option obligations.
This best-case scenario profit would be $20,000 - $15,950 = $4,050/$15,950 = 25.3% achieved in just about 6.6 months on shares which only needed to rise by 11.5%.
If Ingram Micro shares finish unchanged at $17.95 on the Sep. 17, 2010 expiration date:
· The $20 calls will expire worthless.
· The $17.50 puts will expire worthless.
· You will hold 1000 IM shares worth $17,950.
· You will have no further options obligations.
You could liquidate for a net gain of $17,950 - $15,950 = $2,000/$15,950 = 12.5% achieved in about 6.6 months on shares that did not go up.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $17.95 purchase price less the $0.75 /share call premium = $17.20 /share.
On the ‘put’ shares (if IM ends up < $17.50) it’s the $17.50 strike price less the $1.25 /share put premium = $16.25 /share.
Your overall break-even would be $16.73 /share. IM could fall by up to $1.22 /share (-6.8%) without causing a loss on this trade.
Summary:
On the buy/write combination your best-case gain would be +25.3% if IM rises to $20 or higher. You would make 12.5% over the 6.6 months if the shares do absolutely nothing. You are protected against a loss unless IM drops to below $16.73/share.
Disclosure: Author is long IM shares and short IM options.
Source: Ingram Micro: A Long Play With Options