INGRAM MICRO INC IM
June 30, 2015 - 11:18pm EST by
MSG257
2015 2016
Price: 25.03 EPS 0 0
Shares Out. (in M): 166 P/E 0 0
Market Cap (in $M): 4,158 P/FCF 0 0
Net Debt (in $M): 905 EBIT 0 0
TEV ($): 5,064 TEV/EBIT 0 0

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  • Internet Software & Services
  • Low multiple
  • Cloud
  • Distributor
  • Technology

Description

Recommendation

 

We are recommending a long position in Ingram Micro with a 1 year forward price target of $33.83, implying 35.1% upside vs. the 6/30/15 share price of $25.03.  We believe the shares offer a compelling value at current prices trading at 7.7x the midpoint of management’s 2016 guidance of $3.30 of adj. EPS (consensus $3.17; our model is $3.04 fully diluted).  The shares also trade at the lowest valuation among the tech distribution space across most forward metrics (EBITDA, EBIT, Earnings, TBV).   We will keep the write-up brief as the stock has previously been written up by Hawkeye. 

 

Description

Ingram Micro is the largest wholesale technology distributor based on revenues and a global leader in supply chain management and mobile device lifecycle services. The Company distributes and markets a large variety of technology and mobility products from leading companies, such as Acer, Apple, Cisco, Citrix, Hewlett- Packard (“HP”), IBM, Lenovo, Microsoft, Samsung, Symantec, VMware and many others. As a vital link in the technology value chain, Ingram Micro creates sales and profitability opportunities for vendors, resellers, mobile network operators and other customers through unique marketing programs; outsourced logistics and mobile device lifecycle solutions; technical support; financial services; product aggregation and distribution; solutions creation and cloud service models.  Over the past five years, the Company has been working to move up the value chain and added a range of services and solutions to its portfolio. These services fall under the Advanced Solutions Group and include datacenter and network infrastructure, business applications, unified communications, and IT management solutions.  The Company’s operations include 130 distribution centers across 38 countries serving over 200,000 customers.  The Company segments is business across 4 lines:

 

Technology Solutions — Ingram Micro buys, holds title to, and sells technology products and services to resellers who, in turn, typically sell directly to end- users or other resellers. Resellers build efficiencies and reduce costs by relying on Ingram Micro for product availability, marketing, credit, training and enablement, technical support and inventory management.  This segment is the largest contributor to the Company’s revenue and profitability.

 

Mobility — The Company provides end- to- end mobile device lifecycle services to mobile technology manufacturers, mobile network operators, retailers and VARs.  Ingram Micro creates value for its customers through portfolio management, credit management, channel development and marketing with personalized attention to account management. The portfolio of products the Company offers includes smartphones, tablets, machine- to- machine, companion products and accessories. The mobility lifecycle solutions offered include handset distribution, forward and reverse logistics, subscriber identity module (or SIM) kitting, customization services (device configuration, software/application loading, customized packaging and flashing), eBusiness (e- commerce platform, IT integration and hosted web stores on demand), airtime activation, managed financial services, advanced planning and trade- in programs. Recent acquisitions have expanded the Company’s capabilities in mobility repair, refurbishment and asset recovery.

 

Supply Chain Solutions — Ingram Micro offers fee- based supply chain services, encompassing the end- to- end functions of the supply chain to vendors choosing to sell direct. The Company also offers fee- based services to retailers and Internet resellers seeking fulfillment services, inventory management, reverse logistics and other supply chain services. Ingram’s supply chain services are designed to enable customers to better compete by reducing their costs, improving their asset efficiency and increasing the quality of service to their customers.

 

Cloud — The Company has aggregated 224 cloud solutions from 74 vendors on a global basis, spanning virtually every solution category. Ingram Micro’s resellers in certain geographic markets can access the Company’s catalog of cloud solutions and tailor cloud offerings to fit the business needs of their end- user customers. During 2014, the Company transitioned to a global cloud organization and launched a more robust version of its Cloud Marketplace, through which channel partners and IT professionals can browse, buy, deploy and manage a suite of cloud services with ease and efficiency directly from the Company. Ingram Micro’s Cloud Marketplace is live in the U.S., Canada and Mexico and is in the process of launching in the United Kingdom, the Netherlands, France, Germany and Australia. In addition, the Company has added three new Ingram- branded cloud services to our portfolio: Hosted Exchange, Virtual Private Server and Web Hosting.

 

 

Investment Highlights

 

Attractive Business:  Ingram Micro is a stable business that is extremely diversified across:  product, customer, supplier, and geography.  The business has had 1 quarter of negative EBIT since 1995, a period that includes the 2000 - 2002 recession which was particularly harsh on the IT space and the 2008/2009 recession which was one of the most severe since the great depression.  Additionally, we believe the Company’s position as the largest global IT distribution firm provides it with a number of competitive advantages.  While the Company’s scale provides it with strong competitive position on pricing, the Company’s product breadth and geographic reach (the largest in the industry) allow it to differentiate itself on service and also act as a true one-stop shop for its customers.   The Company’s financial strength enables is to provide valuable credit to its customers and act as a reliable, long- term business partner for its suppliers and resellers. These attributes also provide the foundation for expansion in higher margin service- oriented businesses, enabling the Company to take advantage of key market trends, such as global e- commerce growth, pervasive access to data from any device, big data analytics and the rise of the omni- channel. We believe there is a growing demand for additional services and solutions from companies that already have an established global presence and existing infrastructure

 

Expansion Into Faster Growth/Higher Margin Services:  Ingram Micro has recently been expanding into new business that are higher margin and faster growing than its core technology solutions businesses (technology services a 1.4% margin business growing at 2 – 5% annually): 

Ingram Micro New Business Lines

 

Mobility Solutions

Supply Chain Services

Cloud Solutions

Market Drivers

·         Pervasive access to data

·         Smartphone tablet growth

·         Internet of things

·         Changing carrier eco-system

·         Global ecommerce growth

·         Small companies gaining access to world class logistics

·         Rise of omni-channel

·         Returns and repairs

·         Emergence of hybrid cloud

·         SMB access to high end technology

·         Capex to Opex shift

Ingram Advantage

·         Scale and reach

·         Established leadership position

·         Complete Suite of device lifecycle solutions

·         Global scale and reach

·         East low cost onboarding

·         Shipping 200M units annually

·         Pioneering neutral cloud market place

·         One stop solutions

·         Leveraging existing relationships

Financial Metrics

·         $5.5B in 2013 revenue

·         8% - 12% CAGR through 2016

·         2.5% - 2.75% EBIT margin

·         $200M in 2013 revenue

·         25% - 30% CAGR through 2016

·         6% - 8% EBIT margin

·         100% CAGR through 2016

·         >10% EBIT margin long term

 

 

Cost Rationalization Initiative:  Ingram Micro was expected to generate cost savings of $80$100 million as a result of restructuring efforts in 2014. Unfortunately, as 5060% of that was generated in Europe, some of those cost savings have been lost to unfavorable foreign currency translation adjustments (approximately 25%).  However, as a result of the success and experience gained with the 2014 restructuring efforts, management feels comfortable with the recently announced efforts to cut an additional $100 million in costs in FY15. The cost reduction initiatives could add an additional $0.42 of EPS based on management’s target assuming a 30% tax rate.  Our financial projections give management credit for achieving 50% of the cost reduction initiatives.  Assuming 100% flow throw of management’s cost reduction targets would increase our price target to $37.06 translating to 48% upside. 

 

Exposure to Fast Growing Emerging Markets: Ingram Micro generates 29% of its revenue from Latin America and Asia and 28% of its revenue from Europe.  While some of these regions are currently experiencing cyclical challenges we believe the long-term secular trend in Asia and Latin America is toward greater adoption of technology, which should bode well for Ingram Micro over the long term.

 

Income Statement

 

 

    2013 2014 2015 2016 2017 2018 2019
Net sales            42,553,918          46,487,426          46,899,682          48,306,672          49,755,873          51,248,549          52,786,005
Cost of sales            40,064,361          43,821,709          44,218,459          45,545,013          46,911,363          48,318,704          49,768,265
                 
Gross profit              2,489,557            2,665,717            2,681,223            2,761,659            2,844,509            2,929,845            3,017,740
                 
Operating expenses:                
Selling, general and administrative            1,891,573            2,025,948            2,007,770            2,060,290            2,122,098            2,185,761            2,251,334
Factoring                          -                          -                          -                          -                          -                          -                          -  
Amortization of intangible assets                 48,480                 58,962                 48,468                 38,121                 38,035                 38,035                 38,035
Reorganization costs                   34,629                 93,545               115,290                 15,450                 15,914                 16,391                 16,883
Australia Business Fix                          -                          -                          -                          -                          -                          -                          -  
Reorganization Plan                            -                   (9,063)               (50,181)               (51,185)               (52,209)               (53,253)
Brightpoint Cost Synergies                        -                          -                          -                          -                          -                          -                          -  
Impairment of goodwill                          -                          -                          -                          -                          -                          -                          -  
               1,974,682            2,178,455            2,162,466            2,063,679            2,124,862            2,187,979            2,252,999
                 
Income from operations                 514,875               487,262               518,757               697,980               719,647               741,866               764,741
                 
Other expense (income):                
Interest income                   (7,652)                 (4,882)                 (6,813)               (11,739)               (15,356)               (19,098)               (22,967)
Interest expense                   59,165                 77,728                 60,778                 53,307                 53,698                 54,100                 54,514
Net foreign currency exchange loss (gain)                 11,578                   4,260                   7,538                        -                          -                          -                          -  
Loss from settlement of interest rate swap and senior unsecured term loan                        -                          -                          -                          -                          -                          -                          -  
Other                   15,686                 15,405                 13,929                 14,347                 14,777                 15,220                 15,677
                    78,777                 92,511                 75,432                 55,914                 53,118                 50,222                 47,224
                 
Income before income taxes               436,098               394,751               443,325               642,066               666,529               691,644               717,517
Provision for income taxes               126,515               128,060               135,233               192,620               199,959               207,493               215,255
                 
Net income                 309,583               266,691               308,092               449,446               466,570               484,150               502,262
Adjusted Net Income                 368,234               364,718               422,036               486,946               504,334               522,249               540,704
                 
EBITA                 597,984               639,769               682,515               751,551               773,596               796,292               819,658
EBTIDA                 678,419               726,835               766,857               836,966               860,731               885,183               910,341
                 
Depreciation                   80,435                 87,066                 84,342                 85,415                 87,136                 88,891                 90,683
                 
Basic earnings per share                       2.03                     1.74                     2.00                     2.92                     3.04                     3.15                     3.27
Diluted earnings per share                     1.98                     1.67                     1.92                     2.81                     2.91                     3.02                     3.14
                 
ADJ - Basic earnings per share                     2.41                     2.37                     2.75                     3.17                     3.28                     3.40                     3.52
ADJ - Diluted earnings per share                     2.35                     2.29                     2.63                     3.04                     3.15                     3.26                     3.38
                 

 

 

Comparable Company Analysis                                                
                                                     
Include in Analysis (Y or N)       Subject Co.                                            
Ticker Input       NYSE:Im   NASDAQGS: TECD   NYSE:AVT   NYSE:ARW   NYSE:SNX   NasdaqGS:CDW   NasdaqGS:NSIT               Average   Median
                                                     
Company Name:       Ingram Micro Inc.   Tech Data Corp.   Avnet, Inc.   Arrow Electronics, Inc.   SYNNEX Corp.   CDW Corporation   Insight Enterprises Inc.                    
Latest Fiscal Year:       1/3/2015   1/3/2015   1/3/2015   1/3/2015   1/3/2015   1/3/2015   1/3/2015                    
LTM as of:       4/4/2015   4/4/2015   4/4/2015   4/4/2015   4/4/2015   4/4/2015   4/4/2015                    
                                                     
52-Week High        $        30.46    $           71.31    $          47.27    $      64.98    $     85.25    $                   39.32    $     32.80                    
52-Week High Date       7/24/2014   8/26/2014   3/23/2015   3/23/2015   6/22/2015   4/24/2015   6/23/2015                    
52-Week Low        $        22.22    $           52.22    $          35.53    $      45.47    $     59.27    $                   27.59    $     21.59                    
52-Week Low Date       10/15/2014   10/15/2014   10/15/2014   10/15/2014   10/15/2014   10/15/2014   10/30/2014                    
Daily Volume                     1.5                    0.6                   1.1                0.6               0.3                             0.9               0.3                    
                                                     
Current Price (6/30/15)        $        25.03    $           57.56    $          41.11    $      55.80    $     73.19    $                   34.28    $     29.91                    
    % of 52-Week High       82.2%   80.7%   87.0%   85.9%   85.9%   87.2%   91.2%                    
    % of 52-Week Low       112.6%   110.2%   115.7%   122.7%   123.5%   124.2%   138.5%                    
                                                     
Total Common Shares                 156.3                   36.7                135.8              95.7             39.5                         170.6             38.8                    
     Market Capitalization       3,911.1   2,114.9   5,583.7   5,339.1   2,891.7   5,848.6   1,159.4               3,835.5   3,911.1
Plus: Total Debt                1,415.6                 368.0             2,075.5         2,470.2           735.7                      3,496.0           242.0                    
Plus: Preferred Stock                      -                        -                       -                   -                  -                                -                  -                      
Plus: Minority Interest                      -                        -                       -                  5.0               0.4                              -                  -                      
Less: Cash and Equivalents                 562.7                 619.2                803.5            305.3           221.1                         447.4           186.1                    
     Enterprise Value       4,763.9   1,863.7   6,855.7   7,509.0   3,406.8   8,897.2   1,215.3               4,930.2   4,763.9
                                                     
                                                     
Total Revenue   LFY         46,487.4            27,670.6           27,499.7        22,768.7       13,839.6                     12,074.5        5,316.2               22,236.7   22,768.7
    LTM         46,747.9            26,829.7           28,177.0        22,689.0       13,815.3                     12,177.4        5,321.4               22,251.1   22,689.0
    FY+1         46,944.6            25,188.0           28,025.4        22,915.5       13,491.7                     12,735.9        5,437.4               22,105.5   22,915.5
    FY+2         48,822.7            26,072.5           28,465.0        24,232.7       14,099.4                     13,546.3        5,608.4               22,978.1   24,232.7
                                                     
                                                     
Enterprise Value /   LFY   0.1x   0.1x   0.2x   0.3x   0.2x   0.8x   0.2x               0.3x   0.2x
     Total Revenue   LTM   0.1x   0.1x   0.2x   0.3x   0.2x   0.7x   0.2x               0.3x   0.2x
    FY+1   0.1x   0.1x   0.2x   0.3x   0.3x   0.7x   0.2x               0.3x   0.2x
    FY+2   0.1x   0.1x   0.2x   0.3x   0.2x   0.7x   0.2x               0.3x   0.2x
                                                     
                                                     
EBITDA   LFY             763.5                 332.9             1,013.0         1,036.1           442.8                         880.9           180.3               664.2   763.5
    LTM             767.0                 341.1             1,058.3         1,041.0           497.4                         897.2           179.5               683.1   767.0
    FY+1             833.5                 324.1             1,094.1         1,087.9           467.2                         968.9           191.2               709.5   833.5
    FY+2             913.1                 360.1             1,123.1         1,142.0           514.7                      1,030.6           203.7               755.3   913.1
                                                     
                                                     
Enterprise Value /   LFY   6.3x   7.3x   6.7x   7.4x   8.0x   10.6x   5.4x               7.4x   7.3x
     EBITDA    LTM   6.2x   5.5x   6.5x   7.2x   6.8x   9.9x   6.8x               7.0x   6.8x
(Incl. Equity Inc.)   FY+1   5.7x   5.7x   6.3x   6.9x   7.3x   9.2x   6.4x               6.8x   6.4x
    FY+2   5.2x   5.2x   6.1x   6.6x   6.6x   8.6x   6.0x               6.3x   6.1x
                                                     
                                                     
                                                     
EBIT   LFY             617.4                 264.1                875.8            880.1           351.7                         673.0           139.7               543.1   617.4
    LTM             617.9                 276.4                918.0            884.4           390.0                         688.8           139.4               559.3   617.9
    FY+1             720.0                 272.4                966.0            958.5           413.3                         726.3           144.1               600.1   720.0
    FY+2             814.9                 299.5             1,011.4         1,006.7           455.8                         785.9           155.6               647.1   785.9
                                                     
                                                     
Enterprise Value /   LFY   7.9x   9.4x   7.8x   8.6x   9.8x   14.0x   6.9x               9.2x   8.6x
     EBIT   LTM   7.7x   6.7x   7.5x   8.4x   8.7x   12.9x   8.7x               8.7x   8.4x
(Incl. Equity Inc.)   FY+1   6.6x   6.8x   7.1x   7.8x   8.2x   12.2x   8.4x               8.2x   7.8x
    FY+2   5.8x   6.2x   6.8x   7.5x   7.5x   11.3x   7.8x               7.6x   7.5x
                                                     
                                                     
                                                     
EPS   LFY    $         1.67    $             4.57    $            3.89    $        4.98    $       4.57    $                     1.42    $       1.83                       
    LTM    $         1.78    $             5.60    $            4.29    $        5.02    $       5.04    $                     1.44    $       1.83                       
    FY+1    $         2.76    $             4.81    $            4.41    $        6.20    $       6.23    $                     2.74    $       2.16                       
    FY+2    $         3.17    $             5.30    $            4.74    $        6.61    $       6.91    $                     3.02    $       2.43                       
                                                     
                                                     
P/E   LFY   16.6x   11.7x   10.9x   11.2x   18.0x   23.7x   13.6x               15.1x   13.6x
    LTM   14.1x   10.3x   9.6x   11.1x   14.5x   23.8x   16.4x               14.2x   14.1x
    FY+1   9.1x   12.0x   9.3x   9.0x   11.7x   12.5x   13.8x               11.1x   11.7x
    FY+2   7.9x   10.9x   8.7x   8.4x   10.6x   11.4x   12.3x               10.0x   10.6x
                                                     
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Execution of cost reduction initiatives
  • Margin expansion as mix benefits of new business initiatives kick in
  • Improvements in Europe and Verizon business profitability
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