In a couple of days (after the close on June 23, to be specific), SYNNEX Corporation (SNX, Financial) will report on its second-quarter results.
It’s a company that has a place on the Undervalued Predictable list at GuruFocus, despite a price chart that looks like this:
In this article, we’ll profile the company and analyze its valuations to determine whether we might consider it for a short list of undervalued stocks.
History
1980: Robert Huang founds a company called Compac.
1994: Name changes to SYNNEX (SYNNEX = Synergy + Nexu).
2003: Initial public offering on the New York Stock Exchange, as SNX.
2007: Debuts on the Fortune 500 list at No. 360 (in 2016, No. 212).
2012: Celebrates 100 consecutive profitable quarters.
1997 to 2014: Makes 20 separate acquisitions in 17 years, notably, Concentrix in 2006 and IBM (IBM) Customer Care Business in 2014.
History based on information provided at the company's website.
Comments: A 36-year-old company that has traded publicly for 13 years; as noted, in 2012, it marked 100 consecutive profitable quarters. Many acquisitions suggest this company looks outside its own walls to find growth opportunities.
SYNNEX’s business
The company, primarily a distributor of technology products, operates in two segments: Technology Solutions and Concentrix (all information here from the SYNNEX 10-K for 2015 unless otherwise noted):
- “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.
- “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 10 identified industry verticals.”
SYNNEX says it distributes more than 30,000 technology products. Those products are sourced from at least 300 Information Technology, Consumer Electronics and Original Equipment Manufacturers. In turn, the products go to more than 20,000 retailers, systems integrators and retailers.
This is how the pieces fit together, according to a presentation at the GTDC Investors Conference on May 5:
It sells to customers in 25 countries. Seventy-four percent of its 2015 revenue originated in the U.S.
Overall, its revenue picture looks like this (GTDC Investors Conference):
As we can see, revenue is dominated by the Technology Solutions segment made up of high volume, low margin product sales. The minority of revenue comes from its Concentrix segment, which has more of a consulting flavor.
As the following chart shows, though, Concentrix is an increasingly important contributor to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):
Competition
In its 10-K for 2015, the company says the IT product industry experiences intense competition, based on issues such as “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- and post-sale technical support, flexibility and timely response to design changes, technological capabilities and product quality, service and support.”
It names the following as its main competitors in this space: Arrow Electronics Inc. (ARW, Financial), Avnet Inc. (AV), Ingram Micro Inc. (IM, Financial), ScanSource Inc. (SCSC, Financial), Tech Data Corporation (TECD, Financial), WestconGroup Inc. and, to a lesser extent, regional distributors.
For Concentrix, it lists its major competitors as "Accenture (ACN, Financial), Convergys Corporation, Genpact Limited, SITEL Worldwide Corporation (a wholly owned subsidiary of Groupe Acticall), Sutherland Global Services Inc. (a privately owned company), Sykes Enterprises Inc. (SYKE, Financial), Teleperformance (RCF, Financial) and TeleTech Holdings Inc. (TTEC, Financial)."
Growth
As the following chart shows, SYNNEX has a history of growing both its revenue (green line) and Earnings per Share (blue line).
In its 10-K for 2015, the company says, “We constantly seek to expand our business into areas primarily related to our core distribution and outsourced business services as well as other support, logistics and related value-added services.”
In its GTDC Investors Conference, it summarized its outlook this way:
The analysts followed by Yahoo! (YHOO) Finance estimate the company’s earnings this way:
Those estimates compare with results of $4.57 per share in fiscal 2014 and $5.24 in fiscal 2015.
Comments: SYNNEX Corporation is one of the giants in the technology distribution field. While distribution represents the biggest share of its revenue, the "consulting" category provides a growing share of EBITDA. It operates in highly competitive environments but still expects to continue growing both its top and bottom lines.
Other
- A total of 72,500 employees as of Nov. 30, 2015.
- Registered in Delaware, its head office is located in Fremont, California.
- President and chief executive officer: Kevin Murai, who joined SYNNEX in 2008 as co-chief executive officer; prior to that he was at Ingram Micro for 19 years. While there, his positons included president and chief operating officer as well as serving on the Ingram Micro board of directors.
- Its fiscal year ends on Nov. 30.
Seasonality is an issue: “We have historically experienced higher sales in our fourth fiscal quarter due to patterns in capital budgeting, federal government spending and purchasing cycles of our customers and end users.”
Ownership
Four of the gurus followed by GuruFocus have SYNNEX holdings: Sarah Ketterer (who has the biggest holding among the four, with 415,260 shares), Joel Greenblatt, Jim Simons and David Dreman.
Institutional investors own 76.59% while shorts come in at 9.46%, and insiders hold 3.19%. Among insiders, company founder and former CEO Robert T. Huang has the biggest stake, at more than 447,000 shares. Murai owns 133,134 shares.
Comments: A strong institutional showing, along with a modest number of gurus suggests reasonable confidence by the market. But with the shorts close to 10%, more than a few investors expect this company to stumble in the not-too-distant future.
SYNNEX by the numbers
Comments: The stock is closer to its 52-week high than its 52-week low. Both P/E ratios come in roughly in the mid-teens; the dividend is 80 cents or less than 1% while the payout ratio is low, suggesting the company intends to focus on continued growth.
Financial strength
The GuruFocus automated rating system gives SYNNEX a 7 out of 10 for Financial Strength and the same 7 for Growth and Profitability.
Looking at the left-most column, under Financial Strength, we see no green, no doubt reflecting a long-term debt concern. If we go to Interactive Charts and pull up a chart of the company’s long-term debt, the reason for concern quickly becomes apparent:
Turning to the 15-Year Financials, we can put numbers to the growth of long-term debt (as of year-ends Nov. 30):
• 2011: $224 million.
• 2012: $81 million.
• 2013: $65 million.
• 2014: $264 million.
• 2015: $639 million.
SYNNEX says in its 10-K for 2015 that it increased its borrowing to “fund the acquisition of the IBM CRM business, to infuse working capital into the newly acquired business and to invest in growing our Technology Solutions business.”
Earnings power
The following chart shows the company’s EPS (Earnings per Share) on the green line and its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) on the blue line:
Free cash flow
This chart shows the ups and downs of SYNNEX’s free cash flow:
The GuruFocus system posts one Severe Warning Signal, “Asset Growth: faster than revenue growth” which may be a sign that the company is becoming less efficient.” In this case, we would point to the sizable IBM CRM acquisition, with the expectation this situation will ‘normalize’ in the near future.
Comments: In conjunction with the acquisition of IBM CRM, SYNNEX significantly bumped up its long-term debt. At the same time, we see the dramatic effect on free cash flow, and will likely see effects on other financial metrics in the future.
Valuation
SYNNEX has achieved a 5-Star rating (out of 5) for predictability in the GuruFocus system. That gives us confidence the company’s shares will increase in value and reduces the likelihood of losses over 10 years.
Because SYNNEX is a predictable, highly predictable company, we can value it using the Discounted Cash Flow. On that basis, GuruFocus assigns it this valuation: “Intrinsic Value: DCF (FCF Based) $126.58 (As of Today [after the close June 20]).”
A valuation of $126.58 suggests the current price (at the close June 20) of $92.54 is undervalued by 27%.
However, as we can see on the summary section for SYNNEX, there are wildly different valuations.
The analysts followed by Yahoo! Finance have target prices that aren’t far removed from the current price:
The P/E ratio, tracked over the company’s history as a public company, is roughly in the middle of a range through which it has traveled for some years:
The PEG ratio looks much more dramatic, having risen significantly in the past few years, taking it out of undervalued and into fairly valued territory:
Comments: Although we can find valuations that suit almost every opinion from bearish to bullish, many of us would probably opt for fairly valued status.
Conclusion
SYNNEX Corporation is no doubt a strong and growing company. If it were undervalued, the biggest knock against it as a value stock would be its debt. But this is a fairly valued company.
As the price chart shows, though, this company has experienced lots of fluctuation, or variation, as it has climbed from the mid-$20s to around $100 over five years. So waiting for a dip might offer a chance to get in when it is both undervalued and predictable.
As you will recall, SYNNEX boasts a 5-Star predictability rating. That, in itself, may make this worthy of your short list.
It pays a small dividend, hardly worth holding for but would offer a better yield if bought at a lower price. Several reasons, then, to look for SYNNEX on a pullback.
Disclosure: I do not own nor do I have plans to buy shares of this company.
Start a free seven-day trial of Premium Membership to GuruFocus.
