Ingram Micro's Purchase Of Brightpoint Should Unlock Value

| About: Ingram Micro (IM)

Brightpoint (NASDAQ:CELL) is the biggest gainer on the NASDAQ Monday, up 63% after Ingram Micro (NYSE:IM) announced its plan to acquire the mobility logistics provider for $650 million in cash, while also assuming $190 million in Brightpoint debt.

For short-term Brightpoint shareholders, the acquisition looks outstanding; Ingram is paying a 66% premium to Brightpoint's Friday close of $5.39. Longer-term investors in CELL may be a bit less excited; the large premium paid by Ingram still doesn't cover the massive losses in Brightpoint stock since early February. Brightpoint hit a 52-week high of $12.05 on February 1st, then fell over 62% over the next four months. Consecutive earnings misses and the loss of an key, unnamed customer led to the sharp decline, which knocked the stock down to levels not seen since early 2009.

Still, a 60% one-day jump takes some of the sting out of Brightpoint's recent slide; the key question, of course, is what the acquisition means for Ingram Micro and its shareholders. As of this writing, the market seems moderately bullish on the purchase; IM is up 1.15% on a slightly down day for the broader market.

I'm inclined to agree. Even with the substantial premium to Friday's close, Ingram's purchase price is almost identical to CELL's close the day it disclosed its large customer loss. That loss -- which Brightpoint, at the time, estimated would shave .02-.06 off its 2012 full-year earnings per share -- didn't seem to warrant the 11.2% one-day decline; even at the high end of Brightpoint's projection, and the low end of its updated full-year guidance, the failure to retain the unnamed customer would result in only a 9% reduction in 2012 EPS.

Nor did Brightpoint's consecutive earnings misses appear to show substantial problems with the company's business. Despite the fact that Brightpoint handily beat revenue estimates for both the fourth quarter of 2011 and the first quarter of 2012, the stock fell 15.8% and 11.7%, respectively, as bottom-line results missed analyst projections. The fears of pressure on the razor-thin margins in the wholesale business are understandable; but the massive collapse in CELL stock seemed an overreaction, given its top-line strength.

The premium paid for CELL does make the deal, like most acquisitions, seem a bit pricey; Brightpoint had guided 2012 GAAP EPS at 57 to 63 cents per share. At the midpoint of guidance, Ingram is paying 15 times earnings, well above the single-digit multiples that Ingram itself -- along with competitors like Arrow Electronics (NYSE:ARW) and Avnet (NYSE:AVT) -- commands.

On the other hand, Brightpoint's gross margin of 7.2 percent outpaces IM's 5.3 percent figure. In addition, the wireless industry should provide stronger growth than the struggling IT market in which Ingram Micro currently competes; Brightpoint works with nearly every major smartphone manufacturer, including Apple (NASDAQ:AAPL) (through a relationship with key Apple supplier Foxconn Technology). Brightpoint grew 2011 revenue by nearly 50%, compared to just 5% growth at Ingram Micro; on a pro forma basis, the addition of Brightpoint would have nearly doubled IM's revenue growth in 2011.

Granted, that kind of growth is unlikely to continue; and, as seen in the last two quarters, Brightpoint struggled in turning that revenue growth in substantial bottom-line improvement (EPS grew just 25% year-over-year in 2011, and actually fell in the first quarter despite top-line growth). But the worst-case scenario for Ingram is rather benign. Brightpoint had guided for net income of around $41 million in 2012; that net income alone, at IM's current multiple near 10, should add around $410 million in market value to the stock. Given the $840 million purchase price, the most Ingram will have overpaid -- assuming Brightpoint's business doesn't have more serious issues as yet unknown to the market -- is about $430 million, less than $3 per share.

That risk -- about 16% of IM's current market cap -- is well worth the potential reward. Projected 2014 cost synergies of $55 million would, alone, boost IM's EPS by over 35 cents per share. With analysts projecting Ingram's stand-alone business to earn $2.22 per share in 2013, adding in Brightpoint's profits plus potential cost savings from the integration means 2014 non-GAAP earnings could easily exceed $3 per share, even if Brightpoint registers single-digit earnings growth and cost synergies come in below current expectations.

With IM currently trading at $17.67, the potential for $3 per share in (non-GAAP) 2014 earnings makes the stock a long-term buy, even in the low-growth, low-multiple IT wholesale segment. By that point, Ingram's strong free cash flow will likely have covered the $300 million credit facility required for the purchase, while even a moderately successful integration should boost earnings well above its trailing figure of $1.95 (excluding charges). At its current level, Ingram Micro doesn't have to gain market share, or meet the (often overstated) targets of its acquisition. It simply has to execute reasonably well. With the stock trading at less than 6 times its potential 2014 earnings, there is a significant margin of safety for patient, long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.