Ingram Micro is a world leader in the wholesale distribution of computer products and related services with almost $30 billion in 2009 revenues. They serve more than 170,000 resellers in over 100 countries in North America, Europe, Asia/Pacific regions and Latin America.
IM recently reported better than expected results for their Q4 [ended Dec. 31, 2009] after also posting year-over-year gains in their third quarter. Estimates have been ramping upwards. Consensus estimatesnow see 2010 – 2011 EPS at $1.70 and $1.94 respectively.
This is especially good news as earnings from continuing operations had remained flat at $1.56 from 2006 through 2008 before declining in the first half of 2009. Here are the per share numbers for IM (excluding one-time items) as reported by Value Line:
Year | Sales | C/F | EPS | B/V | Avg. P/E |
2001 | 169.01 | 1.10 | 0.32 | 12.53 | 44.3x |
2002 | 148.96 | 1.15 | 0.49 | 10.85 | 29.2x |
2003 | 148.81 | 1.33 | 0.81 | 12.33 | 15.4x |
2004 | 160.40 | 1.38 | 1.01 | 14.12 | 16.2x |
2005 | 177.43 | 1.91 | 1.50 | 15.02 | 11.6x |
2006 | 185.10 | 1.93 | 1.56 | 17.24 | 12.2x |
2007 | 202.65 | 1.97 | 1.56 | 19.82 | 12.8x |
2008 | 212.99 | 2.07 | 1.56 | 16.46 | 10.2x |
2009 | 175.94 | 1.73 | 1.34 | 17.95 | 11.6x |
The 2005 - 2008 plateau in earnings contributed to the contraction in IM’s multiple from > 15x to about 11.6x – 12.8x over most of the period since 2005. I believe the renewed growth will lead to an expansion of their P/E looking forward.
Based on the consensus views for 2010 and 2011 Ingram now sells for only 10.6x this year’s and< 9.3x next year’s expectations. A rebound to even 13 times the 2010 estimate brings me to a 12-month target price of $22.10 or 23.1% above this afternoon’s quote.
Is that a crazy goal? No. IM shares actually changed hands at peak prices of $21.00 - $22.50 during each calendar year 2004 through 2007 – years when EPS ranged from $1.01 to $1.56 versus the $1.70 estimate for this year. Ingram shares traded north of $54 in 1998 at the height of the tech/internet bubble.
Zacks just put Ingram Micro on its Aggressive Growth buy list. Standard and Poors gives IM a 4-Star rating (out of 5) and carries a 12-month target of $21. Morningstar sees ‘fair value’ as $23 share after processing the good December quarter results into their figures.
Summary:
Ingram’s nice earning surprise and low valuation make for a favorable risk/reward for buyers of IM shares. I see a 20% - 25% one-year move even if the P/E remains well below previous levels achieved when earnings were growing.
There doesn’t appear to be a lot of risk as the absolute low share prices in 2006 and 2007 were $16.50 and $17.80 when earnings were well below what are now projected for 2010.
Option savvy investors might consider this 6.6 month buy/write combination:
Cash Outlay | Cash Inflow | |
Buy 1000 IM @ $17.95 /share | $17,950 | |
Sell 10 IM Sep. $20 calls @ $0.75 /share | $750 | |
Sell 10 IM Sep $17.50 puts @ $1.25 /share | $1,250 | |
Net Cash Out-of-Pocket | $15,950 |
If Ingram Micro rises to at least $20 (+ 11.5%) by Sep. 17, 2010:
· The $20 calls will be exercised.
· You will sell your shares for $20,000.
· The $17.50 puts will expire worthless.
· You will be left with no shares and $20,000 in cash.
· You will have no further option obligations.
This best-case scenario profit would be $20,000 - $15,950 = $4,050/$15,950 = 25.3% achieved in just about 6.6 months on shares which only needed to rise by 11.5%.
If Ingram Micro shares finish unchanged at $17.95 on the Sep. 17, 2010 expiration date:
· The $20 calls will expire worthless.
· The $17.50 puts will expire worthless.
· You will hold 1000 IM shares worth $17,950.
· You will have no further options obligations.
You could liquidate for a net gain of $17,950 - $15,950 = $2,000/$15,950 = 12.5% achieved in about 6.6 months on shares that did not go up.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $17.95 purchase price less the $0.75 /share call premium = $17.20 /share.
On the ‘put’ shares (if IM ends up< $17.50) it’s the $17.50 strike price less the $1.25 /share put premium = $16.25 /share.
Your overall break-even would be $16.73 /share. IM could fall by up to $1.22 /share (-6.8%) without causing a loss on this trade.
Summary:
On the buy/write combination your best-case gain would be + 25.3% if IM rises to $20 or higher. You would make 12.5% over the 6.6 months if the shares do absolutely nothing. You are protected against loss unless IM drops to below $16.73 /share.
Disclosure: Author is long IM shares and short IM options.