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Scott (Wax) Wachsler
Scott (Wax) Wachsler
Articles  | Author's Website |

Tech Data Corp: Adding Bytes

The stock is fairly priced but recent acquisitions allow for plenty of growth

May 17, 2018 | About:

Tech Data (NASDAQ:TECD) is a wholesale distributor of technology products, selling to value-added resellers (VARs), direct marketers, retailers and corporate resellers who support the diverse technology needs of end users. Listed competitors include Ingram Micro, Synnex Corp. and Arrow Electronics.

Short-term value

My short-term (three-to-six week hold) target price for the stock is $92.70, with an initial trailing stop at $80.51. Upward price movement will find resistance at $82.90 and $88.82, with final resistance at $91.89. Downward price movement will find support at $76.60.

The Tax Act

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to

  • Reducing the U.S. federal corporate tax rate from 35% to 21%.
  • Requiring companies to pay a one-time deemed repatriation transition tax (the Transition Tax) on certain earnings of foreign subsidiaries.
  • Generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries.
  • Requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations.
  • Eliminating the corporate alternative minimum tax (AMT) and changing how AMT credits can be realized.
  • Capital expensing.
  • Eliminating the deduction on U.S. manufacturing activities.
  • Creating new limitations on deductible interest expense and executive compensation.

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Act includes a transition rule to effect this participation exemption regime. As a result of the enacted legislation, taxpayers are required to include in taxable income for the tax year ending Dec. 31, 2017, the pro rata share of deferred income of each specified foreign corporation with respect to which the taxpayer is a U.S. shareholder.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a company's earnings and consequently its fair value.

In the case of Tech Data Corp., the company recorded income tax expenses of $95.4 million, which represent the company’s reasonable estimate of the impact of enactment of U.S. tax reform. The amounts recorded include income tax expenses of $101.1 million for the transition tax and a net income tax benefit of $5.7 million related to the remeasurement of net deferred tax liabilities as a result of the change in the U.S. federal corporate income tax rate.

The company will continue to refine the calculation as additional analysis is completed. including a final determination of the deferred tax balances at Jan. 31, 2018, after the federal income tax return is filed, and as further guidance is provided by the Internal Revenue Service.

Insider Transactions

In the past 12 months, the company recorded 82 insider trades involving 192,384 shares of stock. Of those 82 insider trades, 24 were buys involving 119,279 shares of stock, and 58 weresales involving 73,105 shares of stock, creating an insider buy-sell ratio of 1.6 to 1.

Future value

My future (five-year hold) target price for the stock is $114, which is an average annual return of 8%. A prior five-year hold of the stock (2013 to 2018) would have returned an average of 19% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and fair value

My baseline valuation for the stock is $76. Baseline valuations are based on free cash flow value, net current asset value, book value and tangible book value. My current fair value for the stock is $103. The fair value number is my current valuation for a stock based on earnings, earnings growth and the current five-year yield of a AAA-rated corporate bond. Value investing buy, sell and close targets are derivatives of fair value.

Fair warning

Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Tech Data Corp. fiscal year ended January 2018 is fairly valued. The stock is currently trading at levels in line with my most recent $103 fair value estimate. 

Disclosure: I hold no shares of Tech Data Corp.

About the author:

Scott (Wax) Wachsler
I run a baseline equity research firm (Wax Ink)that is not licensed or registered with any government agency.

Visit Scott (Wax) Wachsler's Website


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