Ingram Micro: Shares Expected To Rise On Improving ROI And.. iPhone

| About: Ingram Micro (IM)

Following last week’s meeting with financial analysts by electronics distributor Ingram Micro (NYSE:IM), Citigroup Monday became the latest bank to speak positively on the stock, with analyst Richard Gardner raising his rating from Hold to Buy based on what he believes is an improving rate of return on invested capital, rising demand in the company’s markets, an attractive valuation, and … Apple’s (NASDAQ:AAPL) iPhone!

Ingram last Wednesday, June 6, reiterated a forecast for second quarter sales of $8 billion to $8.25 billion , which at the top end would be more than analysts had expected, and said it expected to reach $40 billion in sales annually in three years from now, up from an estimated $35.6 billion that analysts expect the company to make by the end of next year.

Says Gardner:

Return on invested capital is now modestly above weighted average cost of capital [WACC] for the first time since 1998. Our modeling suggests additional improvement in ROIC from 10% to 12-15% within three years […] We expect U.S. end-market growth to accelerate late this year as comparisons ease and corporate IT spending growth returns to trend.

Interestingly, Gardner says that Dell’s (NASDAQ:DELL) recent reports, plus some rumors, that it will sell a variety of computers through Wal-Mart (NYSE:WMT), will heighten the value of wholesale distributors like Ingram:

A channel push by Dell should reinforce the notion that Ingram Micro, and other distributors and resellers, represent a critically important part of the IT supply chain. We continue to believe that wholesale distributors such as Ingram Micro represent the most cost effective route to the tens of thousands of resellers who provide local IT service and support to hundreds of thousands of small to midsized businesses.

Lastly, Gardner conjectures that Ingram will “handle most or all product staging and fulfillment for Apple’s forthcoming iPhone,” which is set to arrive in stores June 29.

At a forward price-to-earnings ratio of about 12x, Gardner thinks the stock has room to run to $26 a share.

Gardner’s report follows an initiation of coverage at Overweight by Lehman Brothers analyst Harry Blount last Thursday, June 7.

However, despite a lot of positive feedback about last week’s meeting, some pretty enthusiastic analysts nonetheless maintain the stock at Neutral or the equivalent rating and see little upside from the current $21 a share price:

  • R.W. Baird & Co. analyst Daniel Renouard, June 8, says Ingram’s meeting “displayed a deep bench of management expertise […] across geographies and emerging growth segments […]” but he’s nonetheless concerned there may be a coming turn-around at competitor Tech Data Corp (NASDAQ:TECD) and thinks that at a P/E of 13.2x 2007’s expected $1.60 per share in profit, the stock has not much upside to $22.
  • Also on Friday, Goldman Sachs’s Min Park advises investors to “add to positions” in Ingram stock “on improving growth and profitability prospects,” especially if tech stocks sell-off this summer, in order to “capture second half [of the year] seasonality and better fundamentals” for Ingram. While Min believes the stock’s current P/E of 12.3x this year’s projected $1.72 a share in profit is low, his target is only $23, implying little upside from here.
  • Thomas Weisel’s Matthew Sheerin on June 7 said the plan to reach $40 billion in annual sales “seems entirely reasonable to us, given the company’s solid track record over the last three years […]” but that, nonetheless, the low forward P/E of 11.2x estimated profit next year of $1.88 is an appropriate discount on the stock “given a general lack of catalysts for the global IT spending market.” He rates the shares Market Weight.
  • IM 1-yr chart:
    im chart