* All data are as of the close of Friday, December 19, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Investors looking into the Computers Wholesale industry need to look a little more closely at what they are getting, as the companies classified in it are not what you might think.
While most computer hardware and software companies are categorized in the Technology sector, the largest two U.S.-based Computers Wholesale companies - Ingram Micro Inc. (NYSE: IM) and Tech Data Corp. (NASDAQ: TECD) - are actually classified by the SPDR group of ETFs as Retail/Wholesale companies which tend to fall into the Consumer Discretionary sector.
This is quite understandable, really, given that these companies do not create their own computer products, but distribute those of other companies - which products include printers, scanners, projectors, monitors, panels, mass storage devices, mobile phones, digital cameras, video disc players, game consoles, televisions, audio equipment, as well as portable personal computers and tablets, in addition to an array of networking products, including switches, hubs, routers, wireless local area networks, wireless wide area networks, network interface cards, cellular data cards, network-attached storage, modems, phone systems, and video/audio conferencing equipment.
Meanwhile, the third largest U.S.-based company in the space - United Stationers Inc. (NASDAQ: USTR) - is classified by SPDR as an Industrial Products company which falls into the Industrials Sector. This is so due to the company's heavy involvement with industrial supplies such as hand and power tools, safety and security supplies, janitorial equipment, oil field and welding supplies, as well as various industrial maintenance, repair, and operational items - in addition to many of the computer related hardware distributed by its competitors as listed above.
Thus, when looking at the Computers Wholesale industry, don't think just technology. Think discretionary and industrials. This means we'll have to compare our three contestants to different benchmarks to get a better idea of how well they have been performing during this lengthy economic recovery - producing results which are split from poor to great, as graphed below.
Since the economic recovery began in early March of 2009, two of our three contestants have beaten the broader market S&P 500's 207% gain [black], they being Tech Data with a 262% gain [purple] and United with a 355% gain [orange], while the largest of the three, Ingram, fell short at just 185% [beige].
Yet comparing each company to its sector's SPDR benchmark ETF produces much more varied results. Where United [orange] greatly outperformed its Industrials sector benchmark (NYSE: XLI) [yellow] by 355% to 265% thanks to its inclusion of consumer discretionary products, Tech Data [purple] greatly underperformed its Consumer Discretionary sector benchmark (NYSE: XLY) [blue] by 262% to 340%. Ingram [beige], meanwhile, failed to come close to either the broader market or its Consumer Discretionary benchmark.
On an annualized basis, where the S&P has averaged 36.00%, Ingram has averaged 32.17%, Tech Data has averaged 45.57%, while United has averaged 61.74% per year. All still quite impressive returns, though quite varied when compared to their benchmarks.
Looking forward, the Computers Wholesale industry's earnings are expected to substantially outperform the broader market's average earnings growth rate as tabled below, where green indicates outperformance, while yellow denotes underperformance.
Over the near term out to 2015, the industry's earnings are seen growing at a stellar 2.22 to 8.96 times the S&P average growth rate, before slowing to a more sustainable but still robust 1.63 times annually over the next five years.
Zooming in a little closer, the three largest U.S. companies in the space are expected to split perform, as tabled below.
Where all three companies are expected to under-grow the broader market's average earnings growth in the current quarter, with Tech Data and United shrinking slightly, in the next quarter Ingram and Tech Data are expected to outgrow the S&P at some 1.62 to 2.03 times its rate.
All three are then expected to outgrowth the market in 2015, only to split perform once again beyond, this time with Tech Data underperforming, while Ingram and United outgrow the market at some 1.36 to 1.52 times its rate.
Through it all, Ingram seems poised to deliver the strongest earnings growth of the three overall.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Ingram delivered the greatest revenue growth year-over-year, where Tech Data delivered the greatest earnings growth. At the low end of the scale, both Ingram and Tech Data reciprocated their places as growing the least, with Ingram and United posting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, United operated with the widest profit and operating margins, while Ingram and Tech Data split the narrowest margins between them.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, United's management team delivered the greatest returns on assets and equity, where Tech Data's and Ingram's teams split the least returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Tech Data provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Ingram's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Ingram's stock is cheapest relative to forward earnings, company book value and 5-year PEG. At the overpriced end of the spectrum, United's stock is the most overvalued relative to earnings and company book, while Tech Data's is the most overpriced relative to PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Ingram offers the highest percentage of earnings over current stock price for all time periods, while United offers the lowest percentages overall.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Ingram offers the greatest growth in the current and next quarters, as well as in 2015. At the low end of the scale, United offers the slowest earnings growth near term, where Tech Data offers it longer term.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe United's stock offers the greatest upside potential and least downside risk, while Tech Data's stock offers the least upside and greatest downside.
It must be noted, however, that United's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Ingram is best recommended with 6 strong buys and 3 buys representing a combined 90% of its 10 analysts, followed by United with 2 strong buys and 0 buy ratings representing 33.33% of its 6 analysts, and lastly by Tech Data with 1 strong buy and 2 buy recommendations also representing 33.33% of its 9 analysts. (The tie-breaker goes to United given its greater number of hold recommendations.)
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Ingram with a wholesale lead, outperforming in 14 metrics and underperforming in 5 for a net score of +9, followed far behind by United, outperforming in 11 metrics and underperforming in 12 for a net score of -1, and lastly by a short-circuited Tech Data, outperforming in 6 metrics and underperforming in 15 for a net score of -9.
Where the Computers Wholesale industry is expected to outperform the S&P broader market substantially this and next quarters, significantly in 2015, and meaningfully beyond, the three largest U.S. companies in the space are expected to split perform in earnings growth versus the broader market, with Ingram outgrowing most consistently, Tech Data rising and falling from under- to out- and back to underperform, and United rising from under- to outperform.
After taking all company fundamentals into account, Ingram Micro Inc. computes the sounder financial stats, given its lowest stock price ratios, highest trailing revenue growth, highest EBITDA over market cap, highest future earnings over current stock price in all periods, highest future earnings growth near term and in 2015, and most strong buy and buy analyst recommendations - decisively winning the Computers Wholesale industry competition.