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Ingram Micro, Inc. – ‘Distribution’ of Wealth

February 23, 2010 | About:
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.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.4/5 (7 votes)

Voters:

Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Aggressive Growth - From ZACKS

Ingram Micro Inc. By: Bill Wilton

March 17, 2010

Ingram Micro Inc (IM) just reported another earnings surprise and analysts are raising their forecasts.

Ingram Micro provides marketing, logistic, technical and other services for its customers. The company serves technology vendors and resellers across the globe.

Another Earnings Surprise

Ingram Micro reported fourth-quarter earnings per share of 61 cents on Feb 18. This number came in 9 cents ahead of expectations and is the company's sixth surprise in 7 quarters.

Management highlighted the impressive sequential growth, lead by North America. Ingram Micro's CEO, Gregory Spierkel, concluded his comments by saying "...There is still more work to do, but the trends are positive and we are externally focused on growth with enhanced profitability."

Analysts React

Ingram Micro analysts have raised their full-year estimates following the report. The Zacks Consensus Estimate for 2010 is up 18 cents, to $1.70. Next year's projections average $1.94, up 19 cents.

Given last year's earnings of $1.34, the expected growth rates are 27% this year and 14% in 2011.

Value to Boot

In addition to solid growth, shares of IM are trading at under 11 times forward earnings. The growth is coming at a discount with a PEG ratio of 0.8 times.

Full-year estimates are bouncing back sharply after a steep drop. Shares have stabilized lately, but as estimates continue to climb, the stock should follow.

Bill Wilton is the Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Growth Trader service

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