Sometime in the second half of 2020, Synnex Corp. (SNX, Financial) is expected to complete the plan to spin off its subsidiary Concentrix.
Acquired in 2006, Concentrix provides a range of services for client companies. The company describes it in the 10-K for 2019 as: "Our Concentrix segment offers a portfolio of strategic solutions and end-to-end business services focused on customer engagement strategy, process optimization, technology innovation, front and back-office automation and business transformation to clients in ten identified industry verticals."
The Synnex piece of the company is: "Our Technology Solutions segment distributes peripherals, IT systems including data center server and storage solutions, system components, software, networking/communications/security equipment, consumer electronics, or CE, and complementary products."
Another way to think of the two is that Technology Solutions provides hardware, while Concentrix offers software and human services.
Why split the company? According to CEO Dennis Polk, in a news release announcing the plan, "The spinoff will provide each company with sharper strategic and managerial focus and enable SYNNEX shareholders to own and value each business separately."
Once the spinoff has been finalized, both will be publicly traded companies. And shareholders in Synnex at that time will receive shares in Concentrix. In the spinoff announcement, the company noted: "Immediately following the separation, SYNNEX shareholders will own shares of both SYNNEX Technology Solutions and Concentrix, at the same percentage owned of SYNNEX, prior to the transaction."
Will it be worthwhile to own shares of the two companies, rather than just one? Probably. Spinoffs, particularly in the tech industry, often work well because the pre-existing company can focus on just one set of management challenges, and management of the new company can accelerate their growth plans.
Is this split a good thing for investors over the next five to 10 years? We'll investigate by seeing how well management has done at growing the company over the past decade.
Financial strength
The first five line-items in the financial strength table all reference debt- and most are red or getting close to red, which is not the color an investor wants to see. It represents debt, and this chart shows how short- and long-term debt have evolved over the past decade:
And what has the company done with that debt? Well, it has increased revenue and other metrics, and the bottom line is that it has roughly tripled its earnings per share over the same period.
As for the concern about being able to pay its bills, Synnex has interest coverage of more than 5, meaning its operating income exceeds its cost of interest five-fold.
GuruFocus reports that a corporation with a Piotroski F-Score of 5 is a typically stable company.
We should also be concerned that the return on invested capital is less than the weighted average cost of capital. This means the company is earning less from its borrowed and invested capital than it is paying, meaning it is destroying shareholder value.
However, if we look at the 10-year record, we see that the figure displayed in the table depends too much on recent results. Over the past decade, the weighted average cost of capital has averaged 7.94%, while the average return on invested capital has been 9.38%. Therefore, over the longer term, Synnex has been growing shareholder value, not diminishing it.
Profitability
A company's profitability is driven by its margins, and Synnex's look challenged because they are in the low single digits. Yet, this competitive comparison shows its operating margin is in the middle of the pack for its industry (the size of the bubbles indicates market capitalization):
The same story holds for the net margin, based on the yellow bar in the "Vs Industry" column.
In its 10-K for 2019, the company reported, "The Technology Solutions industry in which we operate is characterized by low gross profit as a percentage of revenue, or gross margin, and low income from operations as a percentage of revenue, or operating margin."
Concentrix offers higher margins, so after the two groups are split, expect the continuing Synnex to have lower margins and Concentrix to have even higher margins.
Both ROE and ROA are also typical for the software industry.
Where Synnex really shines in the Profitability section is in the way it has been able to improve its growth metrics over the past three years:
- Revenue up an average of 9.5% per year.
- Ebitda up an average of 22.5% per year.
- Earnings per share, without non-recurring items, up an average of 18.3% per year.
Those are the types of increases that investors really like to see.
Valuation
First, let`s take a look at a 10-year price chart:
Regardless of what experts say about timing the market, it really does matter when you buy Synnex stock. Pick it up on a deep dip and you have a winner, pick it up on a spike and live with regret.
I can`t see anything but a spike right now, even though GuruFocus gives it a middling mark for valuation.
The bars next to the price-earnings ratio tell us the company is more competitive than many of its peers in the software industry, and the yellow bar tells it is likely close to its longer-term median. Checking the yellow bar shows us the current price-earnings ratio is just slightly higher than its 10-year median of 13.22.
The discounted cash flow calculator brings a surprise. It shows a 20.45% margin of safety, which is quite good. That provides a bit of room for mistakes made in analysis or for unforeseen events.
Because Synnex is a full five-star predictability stock, we can be confident that the DCF calculator price is reasonable. Further, the combination of an undervalued price and high predictability rating mean it is an Undervalued Predictable stock (one of GuruFocus' top value investing screens).
Dividends
A glance at the dividends and buyback table shows us the dividend payout ratio is just 12%, more typical of a growth company than a mature company.
Still, Synnex has paid one since 2015 and the dividend yield is currently 0.89%, which is low when compared with the S&P 500 average. But, again, timing and price levels matter, as shown in this five-year chart of share prices and dividend yields:
The case for income takes a big step up upon reading that the average annual dividend growth has been an average of 20.8% per year over the past three years.
That's one of the reasons why the five-year yield on cost is so much higher than the current yield. The yield on cost of 7.94% gives us an indication of what return we might receive annually if we were to buy and hold the stock for five years, while the company continues to increase its dividend at the same rate as it has for the past five years.
Share buybacks are another way of rewarding shareholders, but it would appear, by virtue of the negative three-year average share buyback ratio, that it has not.
Looking to the 10-K for 2019, we find Synnex's board authorized a three-year, $300 million repurchase program in 2017. But it wasn't until last year, 2019, that it acted, spending just over $81 million to buy back 159,930 shares.
To replace that program, which expired this year, it has authorized up to $400 million in share repurchases in the three years following July 1, 2020.
Gurus
Seven of the investing gurus followed by GuruFocus had positions in Synnex at the end of March.
Sarah Ketterer (Trades, Portfolio) held 2,071,409 shares, good for a 4.02% stake in Synnex. The stake also represents 2.42% of Causeway Capital Management's funds.
Jim Simons (Trades, Portfolio) of Renaissance Technologies held 265,428 shares, while Pioneer Investments (Trades, Portfolio) held 68,255 shares.
Conclusion
Based on how Synnex has performed over the past 10 years and five years (since the dividend`s inception) suggests this is a quality company. It also indicates it could become a better one after Concentrix is spun off later this year. The company has robust profitability and its dividend may be young and small, but the recent rate of growth hint of a much higher dividend to come.
Synnex will be of most interest to growth investors, and the capital gains it (and soon-to-be independent Concentrix) will generate over the next five years. Income investors who have multiple years before they retire might buy it for income (despite the low current yield, the growth rate is commendable). And value investors should weigh the difference between its current spike and its DCF margin of safety.
All of this assumes the COVID-19 epidemic will either slow in the not-too-distant future or that the economy will recover in spite of it. It also assumes the Concentrix spinoff will proceed as planned and that the split will be good for both companies. Investors should do their own, deeper diligence.
Disclosure: I do not own shares in any companies named in this article.
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