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Synnex Corporation: 101 Consecutive Quarters of Profitability

November 19, 2012 | About:
Synnex Corporation (SNX) is a leading business process services company, servicing resellers, retailers and original equipment manufacturers in multiple regions around the world. SNX provides services in IT distribution, supply chain management, contract assembly and business process outsourcing. Founded in 1980, SYNNEX employs over 10,000 full-time and part-time associates worldwide. It distributes more than 25,000 technology products (as measured by SKUs) from more than 200 IT and CE OEM suppliers to more than 20,000 resellers, system integrators and retailers throughout the U.S., Canada, Japan and Mexico.

SNX operates in two segments: distribution services and global business services. Its distribution services segment purchases IT systems, peripherals, system components, software, networking equipment, CE and complementary products from primary suppliers such as Hewlett-Packard Company, or HP, Microsoft, Panasonic, Lenovo and Seagate and sells them to resellers and retail customers. Its global business services segment offers a range of BPO services to customers that include technical support, renewals management, lead management, direct sales, customer service, back office processing and information technology outsourcing.

Valuation

SNX is trading at 0.89x P/B, a 5% discount to its five-year average P/B of 0.94x. During the Global Financial Crisis in 2009, SNX fell to a 10-year historical low of 0.49x P/B. In terms of earnings-based multiples, SNX trades at 4.40x 12 months trailing EV/EBITDA and 7.39x P/E, respectively.

Financial And Business Risks

SNX is moderately geared with a gross debt-to-equity ratio of 23%. This is mitigated by a strong interest coverage ratio of 7.8. This does not take into account non-cancellable operating leases amounting to $69.9 million.

SNX is in a low margin business, with its gross profit margins fluctuating within a narrow band of between 4.2% and 6.1% for the past ten years. Its distribution segment operates in the distribution and contract assembly service industries, which are characterized by low gross profit margins and low operating margins. The market for IT and CE products and services is generally characterized by declining unit prices and short product life cycles.

SNX operates in a highly competitive environment. The IT product industry is characterized by intense competition, based primarily on product availability, credit terms, price, speed and accuracy of delivery, effectiveness of sales and marketing programs, ability to tailor specific solutions to customer needs, quality and depth of product lines, pre-sale and post-sale technical support and product quality, service and support.

SNX depends on a small number of OEMs to supply the IT and CE products and services that it sells. SNX's largest OEM supplier is HP. Revenue from the sale of HP products and services represented approximately 35%, 38% and 36% of its revenue for 2011, 2010 and 2009, respectively. Like any other typical OEM supplier agreements, SNX's contracts with HP are short-term in nature and may be terminated without cause upon short notice. For example, IBM terminated its approval to market IBM System X and related products and services in 2008.

No single customer accounted for more than 11% of its total revenue in 2009, 2010 and 2011. Some of its largest customers include CDW Corporation, Iron Bow Technologies, Staples Business Depot, Insight Enterprises Inc. and Systemax Inc

Business Quality and Capital Allocation

SNX has a consistent and excellent financial track record with 101 consecutive quarters of profitability. It has also achieved a minimum ROE of 10% for every single year in the last decade and a 10 year book value per share CAGR of 14.4%. This lends support to its proven execution in both rising and falling demand environments.

SNX's proprietary IT systems and processes enables it to automate many of its distribution operations. It uses radio frequency and bar code scanning technologies in warehouse operations to maintain real-time inventory records, facilitate frequent cycle counts and improve the accuracy of order fulfillment. To enhance the accuracy of distribution order fulfillment and protect inventory from shrinkage, its distribution systems also incorporates numerous controls such as order weight checks, bar code scanning, and serial number profile verification. This level of automation promotes greater efficiencies of inventory management by replenishing and turning inventory, as well as placing purchase orders on a more frequent basis.

SNX is moving up the value chain in services, solutions & support and investing in high growth, high margin tech segments such as the global business services segment. Year-to-date, SNX's operating margin grew to 2.40%, up 13 basis points year on year, driven by steady progress in the global business services segment with record wins of new three-to-five-year BPO contracts.

SNX does not pay a dividend.

Insider Trades

For the past six months, Peter Larocque, president of U.S. Distribution and Dennis Polk, chief operating officer, have sold a total of 25,000 shares of SNX.

Conclusion

SNX seems fairly priced at current valuations. A re-rating will only occur if there are significant and sustainable

improvement in margins going forward.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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