In a recent note to clients, Singular Research reduced estimates and maintained their SELL rating on Tech Data (TECD) following Q2 earnings (see conference call transcript). The firm cited fundamental deterioration masked by share repurchase and currency gains; weak demand in North America; and pricing pressures which lead to lower margins and worse than expected EPS. Key excerpts follow:
Tech Data reported revenues that were at the upper end of its guidance, but below our forecast. EPS was below our forecast and consensus estimates. The increasing pricing pressures that management had reported at the end of Q1:09 continued through Q2:09. Price competition remains particularly acute in large accounts in the Americas. Demand for IT products also is weakening further, particularly in the US.
Despite strong Latin American revenue growth of 40%, total revenues from the Americas segment was down 3.3%, worse than company guidance. European revenue growth of 23.9% was supported by the strong Euro and contributions from the Scribona acquisition.
On a same store basis, European revenues grew approximately 2%. The company is maintaining its pricing discipline, walking away from deals that to not meet its profitability targets. Margins declined in the Americas and remain weak in Europe. In the quarterly conference call, management repeated its view of an uncertain environment that is mixed with pockets of strength amid general weakness. The tough pricing environment continues, and the company reports signs of a developing slowdown in IT spending.
The Scribona acquisition is propping up European revenues, but integration costs make it dilutive in FY:09. TECD customers are not seeing any change in their IT spending plans in the next two quarters. The company bought back 2.4 million shares or 4.6% of shares outstanding in the quarter.
We perceive this as a sign of a lack of investment opportunities for TECD. Despite the stock buyback, EPS declined 14.7%. We are decreasing our FY:09 revenue and EPS forecasts due to the soft Q2:09 and company guidance that is weaker than our previous forecast. Despite our above consensus projections, the company is not earning its calculated cost of capital. We reiterate our SELL rating.