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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Tech Data Delivers a Surprise
Bucking the otherwise choppy trading today, shares of Tech Data <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TECD)") else Response.Write("(Nasdaq: TECD)") end if %> connected for a $1 5/16 gain to $40 3/4 on the strength of strong second quarter results announced after the close yesterday. This leading international distributor of microcomputer hardware and software products to value-added resellers (VARs), corporate resellers, and retailers said sales rocketed 43% to $2.2 billion in the July period. Excluding a one-time gain on the sale of its Macrotron unit to Ingram Micro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %>, net income rose 29% to $27.7 million, or $0.55 per share. That bested last year's $0.47 per share and beat the consensus earnings estimate of $0.52 per share.
Tech Data benefited from strong results across all segments, with sales at its networking unit up 54%, revenues at its peripherals division up 51%, and software and systems sales up 38% and 24% respectively. While domestic revenues vaulted 19% higher, the stellar growth has come from the international business, which accounted for 26% of total sales versus 11% a year ago. These numbers, however, include full quarter results of Macrotron, which was sold to meet antitrust issues in Germany raised by Tech Data's acquisition of Computer 2000 AG, whose results won't be included in Tech Data's numbers until the third quarter. Like other leading distributors Ingram and CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %>, Tech Data hopes to be one of the big winners in the consolidation game playing out in Europe.
The distribution business is a low-margin affair that depends on economies of scale, access to financing, and asset management. Tech Data continues to show continued operating efficiencies, with sales, general and administrative (SG&A) expenses dipping to 4.28% in the quarter from 4.34% last year. However, with the computer industry suffering through weak average selling prices and lingering effects of the inventory problems that peaked earlier this year, gross margins for the period were just 6.5% versus 6.7% a year ago. The good news here, though, is that inventory turns improved as inventories declined sequentially from $970 million to $811 million. Ingram recently reported a similar sequential dip from $2,279 million to $1,966 million. That's more incremental data suggesting that the inventory glut may be over.
Tech Data now trades at 19 times the $2.28 EPS estimate for the fiscal year ending in January and less than 16 times the $2.76 projected for the following year. Although the shares have suffered through the weakness and volatility seen by the PC industry this year, the company remains interesting as a play on the manufacturing changes taking place in that market as a result of Dell's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> phenomenal success with the build-to-order model. Last September, Tech Data began handling final systems assembly for IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, and it has recently started similar programs for Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> and Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>. To manage the new business, the firm opened a new integration and assembly plant in June. These added responsibilities for manufacturing promise to boost profit margins. When operating margins are thin to begin with, a little margin juice can produce delicious earnings growth.
Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> gained $3 1/4 to $78 1/8 after Morgan Stanley Dean Witter raised its earnings estimate on the Pentium chip maker to $3.15 a share from $3.05 for 1998 and to $3.90 a share from $3.85 for 1999. Morgan Stanley said Intel will benefit from a seasonal uptick in demand and an end to a multi-quarter inventory correction.
Discount warehouse club Costco Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> rose $3 5/16 to $48 3/8 after announcing a 6% increase in August same-store sales and directly refuting rumors concerning a regulatory inquiry into its revenue recognition policy on membership fees. The company currently counts as revenues the entire amount of a customer's yearly club fee when it is received, rather than deferring the revenues and recognizing them in a straight line over the term of the membership. Costco said the policy conforms with Generally Accepted Accounting Principles and that the SEC has no problems with it.
Casual wear retailer Gap Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> regained $3 5/16 to $51 5/16 after falling for the past few days on no apparent news as the company reported August sales of $795 million, up 33% from the same period a year ago. Meanwhile, comparable-store sales rose 9% compared with a 10% increase in August 1997.
Customer management software developer USCS International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USCS)") else Response.Write("(Nasdaq: USCS)") end if %> surged $5 to $31 after announcing it will be acquired by DST Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DST)") else Response.Write("(NYSE: DST)") end if %> for around $874 million, or $37.51 a share, based on yesterday's closing prices -- a 44% premium to USCS's last close of $26. In this all-stock transaction, USCS shareholders will receive 0.62 DST shares for each USCS share. The merger is expected to be accretive to DST's 1999 EPS. DST Systems fell $7 3/16 to $53 5/16, while former parent Kansas City Southern Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSU)") else Response.Write("(NYSE: KSU)") end if %>, which still owns about 41% of DST, lost $1 9/16 to $32 1/4.
Consumer electronics retailer Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> moved up $4 13/16 to $49 1/8 after reporting a 22% increase in sales to $2.181 billion from $1.793 billion a year ago. Same-store sales jumped 17.9%. Due to higher sales and improved margins, the company expects Q2 EPS of roughly $0.40, significantly above last year's EPS of $0.07 and analysts' expectations of $0.18. The company said it is "gaining market share as our sales increases continue to exceed industry growth."
Drug developer Synaptic Pharmaceutical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNAP)") else Response.Write("(Nasdaq: SNAP)") end if %> soared $2 7/16 to $13 5/16 while Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> advanced $2 1/4 to $71 1/2 after the companies announced that the migraine compound they are collaborating on will advance into Phase III clinical trials. According to the companies, the market for migraine therapies is estimated at around $1.2 billion today and could grow to $3 billion by the year 2000.
Biotech firm Emisphere Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMIS)") else Response.Write("(Nasdaq: EMIS)") end if %> leapt $7/8 to $8 after Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> formally selected a proprietary Emisphere carrier for clinical testing of the oral delivery of an important Lilly protein for the treatment of osteoporosis. Lilly has begun preparing for clinical trials and expects the first human dosing to start in 1999.
Real estate investment trust Crescent Real Estate Equities Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEI)") else Response.Write("(NYSE: CEI)") end if %> added $7/8 to $23 3/4 after announcing its board has declared a Q2 cash dividend of $0.55 per common share, which is about 45% higher than last year's $0.38 dividend, payable Nov. 3.
Teltrend Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLTN)") else Response.Write("(Nasdaq: TLTN)") end if %> tacked on $13/16 to $13 13/16 after announcing Q4 EPS of $0.33 a share, $0.03 higher than both the EPS for the same year-earlier period and the analysts' mean estimate.
The American depositary shares of Hitachi Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HIT)") else Response.Write("(NYSE: HIT)") end if %> fell $4 11/16 to $50 1/16 after the Japanese electronics manufacturer said it will lose an estimated $1.8 billion in the current fiscal year, which ends in April 1999. The company blamed slow sales and announced cost-cutting efforts, including a 6% reduction in its workforce mostly through attrition.
VLSI Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VLSI)") else Response.Write("(Nasdaq: VLSI)") end if %>, which makes System-Level Silicon chips for the wireless communications and networking markets, dropped $1 1/4 to $7 9/16 after saying the general slowdown in the semiconductor industry will result in a 5% to 10% sequential drop in fiscal Q3 revenues and EPS below the $0.13 expected by the Street. The company was downgraded by BancBoston Robertson Stephens, BT Alex. Brown, and Donaldson, Lufkin & Jenrette.
Air carrier America West Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> was clipped for a $4 1/8 loss to $15 5/8 after reporting a passenger load factor for August of 72.8%, down from 74.7% a year ago. The company also said its revenue passenger miles, a key airline gauge, was flat during the period at 1.5 billion.
Semiconductor laser beam mask making equipment company Etec Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %> was burned for $1 7/16 to $27 9/16 after reporting fiscal Q4 EPS of $0.80 compared to $0.54 a year ago, beating the Street's mean estimate of $0.77. However, the company said it is "cautious" about its short-term business prospects.
Online development services firm USWeb Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWB)") else Response.Write("(Nasdaq: USWB)") end if %> dropped another $1 1/4 to $11 1/16 after agreeing to acquire new media marketing firm CKS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKSG)") else Response.Write("(Nasdaq: CKSG)") end if %> yesterday for about $344.4 million in stock. CKS Group lost $1 to $14 1/4 this morning despite an upgrade to "buy" from "market perform" from BT Alex. Brown.
Belgium's ICOS Vision Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IVISF)") else Response.Write("(Nasdaq: IVISF)") end if %>, which makes machine vision and inspection systems used in the back end of the chip making process, slipped $2 1/2 to $12 1/8 after saying its net income will be "substantially lower" in the second half of the year than for the first half, due to a slowdown in demand and the Asian financial crisis.
Technology media and marketing firm CMP Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMPX)") else Response.Write("(Nasdaq: CMPX)") end if %> lost $3 1/4 to $12 1/4 after warning that its third quarter net income will come in between $0.01 and $0.02 per share, missing the Street's mean estimate of $0.20. The company said its clients have cut back on advertising lately due to a slowdown in sales growth and the financial instability in Asia and other foreign markets.
3D graphics hardware and software developer Evans & Sutherland Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCC)") else Response.Write("(Nasdaq: ESCC)") end if %> slumped $1 to $14 5/8 after Wheat First Union lowered its rating to "hold" from "outperform." Just last week, Wheat downgraded the firm to "outperform" from "buy."
T.J. Maxx and Marshalls off-price apparel stores operator TJX Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TJX)") else Response.Write("(NYSE: TJX)") end if %> was marked down $1 3/16 to $21 1/4 after reporting a 1% year-over-year advance in August same-store sales. However, the company said last August was its "toughest monthly comparison," as same-store sales gained 11% in the period last year.
Dense wavelength division multiplexing (DWDM) systems maker Ciena <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> fell another $2 3/32 to $26 3/8 and voice and data transport and access systems maker Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> lost $1 13/16 more to $41 15/16 after the two companies announced yesterday that they will delay the shareholder votes for their proposed merger from September 9 to sometime in mid-November.
Discount retailer Value City Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VCD)") else Response.Write("(NYSE: VCD)") end if %> slid $7/8 to $11 3/8 after reporting a 1.8% year-on-year decrease in August same-store sales. Including stores operated by the recently acquired Shonac Corp., the company's same-store sales fell 2.1% in the period.
Industrial fluid filter and separation devices maker Pall Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLL)") else Response.Write("(NYSE: PLL)") end if %> fell $1 1/16 to $20 1/8 after reporting fiscal Q4 EPS of $0.32 versus $0.34 last year, missing the Street's estimate by $0.02. The company said foreign exchange fluctuations knocked $0.03 off its EPS figure for the quarter.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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