Thesis / Summary: Tech Data is an orphan of the tech world.  A boring distributor, that at first glance, has minimal revenue growth, thin margins, no technology advantage or IP, appears to just ship hardware, and the common opinion is that all distribution businesses will eventually be extinguished by Amazon.  I’ve followed TECD (and Ingram Micro) for eight years and fellow investors generally have no interest in hearing about these stocks. 

But, TECD is actually a good company and is trading for 8x EPS with a good balance sheet, and has grown EPS at a 12% CAGR over the past 15 years.  Don’t think of them as a competitor in the tech supply chain – think of them as a middle-man or partner.  Tech Data is the second largest end-to-end IT distributor in the world, connecting over 1,000 suppliers offering hundreds of thousands of products to a broad base of over 115k customers in the form of value-add resellers (VAR’s).  Tech Data provides an indispensable link between vendors and customers. From the vendor perspective, they act as an outsourced, variable cost salesforce, charging a percentage-based commission on sold product. This variable cost relationship allows tech vendors working with the distributor to avoid both building out high fixed cost internal salesforces and replicating the more than 100k customer relationships that Tech Data manages. As a trusted advisor to its customers, Tech Data also serves a marketing function for vendors by making product recommendations.  One former employee, who I spoke with, described himself as a lobbyist for vendors.  “I was a partner of those companies, not just working for a distributor…someone told me once I was a lobbyist – that’s exactly right. I had to know the products well enough and had to build programs and marketing plans to understand how to sell the Microsoft and then the HP product.” 

From the customer perspective, TECD offers the benefits of scale, financing, inventory management, and expertise. Tech Data has massive purchasing scale that it leverages to provide discounts to its customers. Approximately 75% of these customers are small and medium businesses that lean on Tech Data for financing. Tech Data’s just-in-time delivery of its products allows these customers to operate functionally with minimal balance sheet inventory. And, as described above, the company provides its customers with expertise they sometimes lack and will help to educate about new programs or products.  Interestingly, if you are a value-added-reseller, one offering that TECD provides is an employee for-hire. It’s actually a SKU.  If a value-added-reseller is working on an IT installation project and needs additional help or consulting, you can hire a TECD employee (at an hourly rate), who will wear your uniform and appear to be part of your team.  It’s this type of service business and expertise that distinguishes TECD from the pure distribution model you might imagine.  Plus, one common concern is that the value-added-resellers could disintermediate TECD from the supply chain, but CDW (the largest VAR) actually is one of TECD’s largest customers.

Despite the vacuum of interest around this stock, the financials support my qualitative argument that TECD is a good business. 

• EPS – From 2003 through 2018E, TECD has grown EPS from ~$2 to over $10 (12% per year).  The stock currently trades for $85 or near 8x EPS – the same multiple it had during the financial crisis in 2008!  And, unlike most other tech companies, TECD actually includes stock-comp as an expense, which is about $0.50 per share. 
• ROIC – over the past 10 years, TECD has averaged a 14% return on tangible capital, which I think is the key evidence of the business quality.  More impressive is that from 2007-2010, during the financial crisis, TECD grew EPS from ~$2.50 to ~$4.50 and maintained a double-digit ROTIC.
• Revenues adjusted for FX – TECD has nearly 50% of its revenue in Europe.  At first glance, it looks like sales declined by low single digits in both 2015 and 2016, causing reason for concern.  But, the euro had a large impact and adjusting for currency, TECD has been able to grow sales by low-to-mid single digits y/y historically.  
• Margins – some folks balk at TECD because its operating margins are about 1.5%.  But, I view that as a misleading figure.  Think about how the business works – TECD effectively earns a “commission” for selling a product, but books the whole cost of the product as revenue.  If it just booked the “commission” (or its gross profit) as revenue, then operating margins would be closer to 25%.  There’s no economic difference between the two margins, but I suspect folks would think of this of a higher quality business if it had those higher margins. 
• Capital Allocation – part of the reason TECD has been able to generate double-digit EPS growth is because of its strong capital allocation.  Shares outstanding have fallen from 52m in 2009 to 35m in 2016 (before issuing 3m as part of the Avnet deal).  Now, only 12 months after the Avnet deal closed, they were able to return to their target debt level and can resume share repurchases. 
• Inventory and Return Rights – a majority of the company’s capital is made up of its inventory.  Another worry people have is that because technology evolves so fast, TECD must often get stuck with obsolete inventory.  But, remember to think of them as partners, not customers, of the vendors.  On paper, a majority of the inventory is protected by return rights from the vendors, and in practice nearly all of their inventory can be put back to the vendors if it doesn’t sell.  As one former employee said: “Once distribution buys, it is theirs – they own it.  TECD gets about 7c on the dollar if they need to liquidate.  But, 10 times out of 10, the vendor will help them with rebates…deep down you knew you needed each other, so you wouldn’t screw the other person over”. 
•  Management Compensation – paid on ROIC, EPS, and regional profit for certain executives.