Ingram Micro Inc. (IM) is Cheap…But for a Reason

Ingram Micro Inc. (NYSE:IM) has underperformed its peers over recent years.  The shares have not enjoyed the same gains as similar stocks within technology due to margin pressure and lower earnings growth.  Ingram Micro has had many issues, ongoing problems with an ERP implementation, increasing competitive pressure, concern over their ability to integrate Brightpoint and softening demand in its core distribution business.  That said, the stock looks inexpensive and the negative sentiment may be more than priced into the shares.  Ingram Micro’s growth profile has improved.  Primary concern from the Street now surrounds management’s ability to execute on acquisition integration and improve profitability in a somewhat difficult operation environment.

Ingram Micro is a wholesale distributor of information technology across the world.  It also provides sales, marketing and logistics services globally.  IM distributes equipment from network, hardware, computer peripherals, point of sale (POS), mobile, and consumer electronics manufacturers.

The company made three acquisitions in 2H12, BrightPoint, Aptec and Promark Technology.  BrightPoint further expands IM’s exposure to mobile technology and accounts for around 95% of the incremental revenue from acquisitions.  The other two bolt-on acquisitions also improve the revenue profile of Ingram Micro.  Aptec expands the geographic footprint in Africa and the Middle East and Promark increases IM’s government exposure.

Improved profile…

IM’s growth outlook has improved over the past six months and shareholders could benefit from the acquisitions and other changes.  First, Paul Bay has taken over as President of North American Operations and is charged with growing the higher margins services business.  While this will take time, it should contribute positively to margins over the coming years.  Second, the acquisitions mentioned above combined are expected to result in at least a 15% increase in sales.  The Brightpoint acquisition is the most influential due to its size and different markets.  It increases exposure to mobile technology and smart phones. This improves top line growth since this end market has an above average growth forecast.  Specifically, exposure to Apple Inc. (NASDAQ:AAPL) increased from 6% of sales prior to the acquisitions to 11% after.  This is major since Apple sold over 130 million iPhones in 2012.  On top of this Apple is rumored to be launching a lower cost iPhone in 2013, which could put IM technology into the hands of many more users around the world.  Also, margins should improve since Brightpoint is a more profitable business.  There is also an opportunity for cost synergies that would be realized over the next few years.  Synergies can help offset margin pressure from an increasingly competitive environment.

…and IM’s cheaper than competitors…

IM trades at 0.84x book value, up from 0.74x earlier this month, but below the 1.0x multiple of competitors. IM’s TTM P/E is 9.1x, slightly below competitor SYNNEX Corporation (NYSE:SNX), trades at 9.17x, and Tech Data Corp (NASDAQ:TECD), trades at 10.8x earnings.  SYNNEX, Tech Data, and IM all have debt to equity ratios that are quite similar so it is not a discount due to higher debt ratios.  On top of this SYNNEX and Tech Data have negative earnings growth while IM doubled its income in the last year.

…but cheap for a reason

While management is focused on margin improvement, that may or may not materialize.  Execution is a risk and competitive pressures could offset any gains.  Margins are very tight in the industry.  That puts greater pressure to get the integration of acquisitions right, sooner than later.

Australia was and is a challenge for management.  ERP implementation in Australia had more than the usual set of issues associated with it resulting in market share loss.  Australia is historically one of their most important markets, with a significant portion of sales coming from higher margin services business.

In addition to the ERP implementation problems, Ingram Micro may have to undergo a major update of its systems across the globe.  Given the problems with managing an ERP and systems update in one country, the likelihood that problems could arise from doing it across all geographies is high.

Conclusion

While IM’s shares may look relatively cheap, the number of challenges and things that can go wrong along the path to improve profitability and earnings are too many.   Problems with acquisition integration, updating IT infrastructure, a challenging competitive landscape and a still weak European economy could all outweigh any gains made.  Management faces a number of issues and the stock is loaded with execution risk.   The operational issues in Australia are hopefully not indicative of their future performance, but they could be.

The article This Tech Stock is Cheap…But for a Reason originally appeared on Fool.com and is written by Mike Thiessen.

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