Tech Data: Earnings Scorecard

| About: Tech Data (TECD)

Tech Data Corp. (NASDAQ:TECD) reported better-than-expected results for the fiscal fourth quarter 2010 on March 2, beating the Zacks Consensus Estimate by a huge difference of $1.01 per share, posting a surprise of 23.76%.

Fourth-Quarter Earnings Summary

Earnings per share were robust in the quarter and came in at $1.25 per share, up 6.8% from the year-go period. The primary reasons for the improvement in net income were an outstanding effort in working capital management coupled with effective operating cost control and a weak dollar. Moreover, Tech Data benefited from a lower effective tax rate.

The most important highlight in the company’s earnings was its better-than-expected revenues. Total revenues for the reported quarter were $6.28 billion, an increase of 10% from $5.71 billion in the prior-year quarter. This was above the Zacks Consensus Estimate of $6.10 billion.

Improving demand, combined with the strength of certain foreign currencies versus the U.S. dollar positively impacted sales, resulting in the first fourth quarter sequential increase in five years. We expect fiscal 2011 revenues to be modestly higher than 2010 levels.

The company’s balance sheet also remains strong. At quarter-end, the company had approximately $1.12 billion of cash & cash equivalents with long-term debt of $338.1 million. Return on capital employed (ROCE) was 13.0% for fiscal 2010.

Earnings Estimate Revisions - Overview

Despite robust fourth-quarter results, investors were disappointed by the company’s weak first quarter 2011 guidance. The company forecasted weak revenue growth, which is expected to increase in the mid single digit range year over year.

However, the Street was expecting higher growth in revenues. We believe the company's lower-than-expected revenue outlook reflects intense competition and weak industry pricing. Therefore, management is focused on profitability over revenue growth.

The current Zacks Consensus estimate stands at 74 cents for the first quarter, up 17.5% from 63 cents reported in the first quarter of fiscal 2010. The earnings estimates remained unchanged since the earnings announcement meaning that the analysts were generally unmoved by the company’s weak revenue guidance and continue to expect it to deliver on the bottom line.

Agreement of Estimate Revisions

However, analysts believe that Tech Data remains strong due to its focus on inventory and pricing management, as well as improving conditions in the U.S. and Europe. Thus, the analysts have discounted Tech Data’s weak guidance. However, some think that the recovery may take time; and as a result, out of the 8 Analysts covering the stock, 4 have raised their estimates for fiscal 2011, while 3 have lowered theirs.

Magnitude of Estimate Revisions

The magnitude of the estimate revisions remains very strong in the second half of fiscal 2011 as earnings estimates jumped from $3.57 to $3.67, in the last 30 days since the earnings announcement. While the first half remains impacted by weak enterprise spending, which is in a recovery phase, analysts expect fiscal 2011 to be back-end loaded. This is good news.

Tech Data Outperforms

With strong earnings momentum, continued cost-cutting initiatives, diversified customer base, significant operating leverage, better execution, and strong fundamentals, improving IT spending environment and robust demand, we remain positive on the company’s long-term growth prospects.

However, given the company’s conservative revenue outlook, we are doubtful about a near-term rise in share price due to negative investor sentiments. Thus, Tech Data shares are maintaining a Zacks #3 Rank, which translates to a short-term ‘Hold’ recommendation. We have also lowered our price target to $48 in the near-term.

The shares currently trade at a premium to industry leader and closest competitor, Ingram Micro (NYSE:IM), and we believe the current premium valuation is warranted. With much more robust expectations for the year, our long-term recommendation for the stock remains “Outperform."