Tech Data: Earnings Preview

| About: Tech Data (TECD)

Information Technology products distributor Tech Data Corp. (NASDAQ:TECD) is slated to release its fourth quarter 2012 results before the opening bell on February 28, 2012. We expect Tech Data to earn $1.65 per share on revenues of $7.16 billion in the fourth quarter.

Prior-Quarter Recap

In the third quarter of fiscal 2011, Tech Data reported earnings per share of $1.26, missing the Zacks Consensus Estimate by a penny. Total revenue in the quarter was $6.59 billion, up 7.0% from $6.16 billion in the year-ago quarter. However, revenues were shy of the Zacks Consensus Estimate of $6.75 billion.

For the fourth quarter, Tech Data expects low single-digit sales growth in both U.S. and Europe on a year-over-year basis. For further details please see Tech Data Misses 3Q Estimates.

Estimate Revision Trend

In the run-up to the earnings report, the consensus estimate has increased by three cents over the last thirty days. Of the eight analysts covering Tech Data, only one raised estimates over the last 30 days.

Analysts believe that higher hard disk drive (HDD) prices and an improving domestic market will boost Tech Data’s earnings in the near term. However, we believe that the ongoing softness at its largest revenue contributor Hewlett-Packard Corp. (NYSE:HPQ) will hurt top-line performance in the quarter.

We note that on an average, Tech Data has posted an earnings surprise of 6.54% in the trailing four quarters, implying that it has outdone the Zacks Consensus Estimate by the same magnitude over the period. We do not expect a major change in the earnings surprise trend for the current quarter.

Conclusion

We believe that Tech Data faces a number of headwinds in the near term, including a volatile European market (approximately 60.0% of revenue), 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 calendar year 2012. Tech Data derives approximately 15% - 20% of revenue from PC distribution.

However, we believe that the company’s profitability will be driven by higher HDD pricing in the near term. Tech Data’s strategy of shifting resources from lower-performing regions to higher-growth regions, cost reductions (shutting down business in the loss-making Brazilian unit) and accretive acquisitions (14 acquisitions added $1.5 billion in sales over the last four years) will drive growth over the long term.

However, we note that year-to-date, Tech Data has outperformed the S&P 500 by 14.1%. This also compares favorably with its primary competitor Ingram Micro Inc. (NYSE:IM), which has increased 7.3% year-to-date. We believe that strong organic revenue growth, increasing enterprise spending and an aggressive share repurchase policy will drive the stock over the long term.

We have a Neutral recommendation on Tech Data’s shares over the long term. Currently, Tech Data has a Zacks #2 Rank, which translates into a short-term (1-3 months) Buy rating.

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