Author Topic: TECD - Tech Data  (Read 3392 times)

Okonomen

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TECD - Tech Data
« on: September 30, 2018, 06:06:09 AM »
Hi all

I have come across Tech Data in my search for undervalued companies and I am in quite of a dilemma here, as I feel this is a cheap high quality business with competent well-incentivized management but in a terrible industry.

* 2,9 bUSD mcap, 8x p/e, 6x ev/ebit, +10% fcf yield. Shares recently dropped ~35% due to 1) concerns about synergies from a recent big acquisition, 2) intensifying competition and 3) disappointing earnings guidance

* Tech Data is not that complicated. They simply distribute electronics/tech products to resellers (they are the middle man who takes a little cut)

* They buy very large quantities secured by the vendor (e.g. Apple, HP, Dell, IBM, Cisco) and sell to their huge reseller network of +100.000 customers at a low margin. EBITDA-margin is around 2%

* It's all about cash conversion cycles, i.e. how fast can they buy, stock and ship the products (TECD is the best among the peers I have used to benchmark)

* Products could be "broadline" electronics such as consumer electronics (notebooks, mobile phones, laptops, pc parts etc) and it could be servers, data centers, cloud etc

* In a way they don't care about who wins the tech wars as they just distribute the products no matter who wins, but Apple constitutes 21% of revenues if I remember correctly

* 45% sales in the US, 50% in Europe and 5% in Asia

* They are indispensable in the supply chain as no vendor would ever want to use the resources to build TECDís capabilities (logistics centres, distribution and buyer network among others)

* Scale is key and Tech Data is 2nd biggest worldwide after Ingram (afaik). Distributors also try to differentiate with e.g. value-added services. They take care of everything (technical teaching to resellers/retailers etc) for the vendor so e.g. Apple can focus on producing great products

* The business requires minimal capex and is a highly cash efficient business (capex is ~0,2% of sales, fcf generation is amazing but also a little tech cyclical I guess. Over time, however, they have generated huge amounts of cash often at 150% of EBITDA)

* They are currently digesting a big acquisition (Avnet's former data center/cloud division now called TS in TECD). This business area has +10% annual growth as opposed to their other divisions closer to low single digit growth

* Ongoing cost-out projects should boost margins a little in the coming years (~180 mUSD in total cost-outs. However, around 40 mUSD will be invested back in the business annually)

* Payables/inventory ratio is around 2x meaning that vendors (Apple, HP etc) actually finances TECD's own inventory. This is great for ROIC.

* Has been growing EPS annually for many years almost doubling since 2013 (incl the TS acquisition)

* ROE and ROIC of +10% and 20-30% very consistently.

* Industry is "boring" and tough with big scale advantages. High barriers to entry and few competitors

* Management pay relies on ROIC, EPS and operating margins, management own  2% of shares with high base salary multiple

* EPS can be quite lumpy but management has a history of being conservative

* Historically mgmgt has been very opportunistic regarding buybacks, and I think a new buyback is underway now that they have paid off a lot of debt after the TS acquisition (very rapid debt payoff also a prove of their very strong cash flow generation)

* Current ND/EBITDA is around 1x, net gearing is 80% of tangible equity. I see this as a very strong capital structure especially due to the earning power and great fcf.

* Currently TECD's earnings are "artificially pressured" by 1) acquisition related amortization of intangibles of ~89 mUSD annually and 2) restructuring charges from the TS acquisition of 136 mUSD. These numbers are from the most recent annual report


I have compared TECD with 3 competitors: Synnex, Ingram and Arrow Electronics. Period: 2010-2018.

* For the ROIC calculation I used NOPAT/(inventories+receivables+accruals/prepaids+PP&E less payables and accrued/prepaid liabilities). This ROIC ignores goodwill and other intangibles as these are mostly M&A related. TECD crushes competitors on most metrics I have analyzed. TECD's ROIC is ~30% on a rolling quarterly basis vs competitors who has around 10-20%.

* TECD crushes them even more when I use FCF instead of NOPAT (i.e. CROIC). TECD has around 30% CROIC vs competitors closer to 10%.

* TECD's payables/inventory ratio at ~2x is highest also showing their great buying power.

* CAPEX/sales is also the lowest around 0,2% compared to peers at 0,5-1%.

* Cash Conversion Cycle is also the best at around 21 days average competitors at 25 (Ingram), 47 (Synnex) and Arrow (53). CCC is very dependent on product types of course and as TECD is heavy in broadline consumer electronics its fair that they have a lower CCC compared to e.g. Arrow who distributes higher margin but more slow moving products.

* TECD has the lowest EBITDA-margin around 2% where competitors range is 2-4%. This depends a lot on product mix, i.e. cloud/data center solutions have higher margins than broadline distribution as mentioned before.

* TECD's SGA/sales is also lowerthan competitors at 4% vs 5-9%


Concerns:

* Apple is ~21% of revenues. I'm not sure how fast TECD would be able to offset less sales from Apple if Apple one day were to either stop using TECD or reduce their use of TECD

* I feel like the TS acquisition made a lot of sense (nice add-on complementary product area with higher growth and higher margins). However, I also feel like TECD may have overpaid at around 9x EV/EBIT as far as I can see (TECD trades closer to 6x), and TECD even diluted their own shareholders with 8% share issuance for the purchase. I wonder why they didnít just use more debt for the purchase, and I cannot find any mgmt discussions about the price paid for TS (e.g. mentioning EV/EBITDA multiples or anything).

* Some fear that AMZN could eat their lunch. However, I highly doubt this for several reasons. 1) Why should AMZN want to go into this tough industry with low margins? Using ROIC calculation as NOPAT over equity+netdebt TECD only generates 11-14% ROIC annually. 2) AMZN would not only have to copy TECD's and others distribution capabilities. They would also have to provide the value-adding services to resellers/retailers

* The whole industry seems quite depressed on multiples and mgmgt's warning of intensified competitive pressure is not great to hear. however, this is probably already baked in.


Back-of-envelope valuation

Historical FCF as % of sales has been around 1,5% and using this as a run-rate FCF in perpetuity on ~37b USD sales, a 10 % WACC and 2% terminal growth, I get around 159 USD/share value, i.e. 122% upside. This would imply a 14,5x P/E. Not that demanding. Here I assume that the new TS division will match the former TECD's FCF capabilities. It looks like a lot of bad is baked into TECD's share price today.

Would really appreciate some feedback here if anyone has also had a look at this company

BR
Steffen
« Last Edit: September 30, 2018, 01:39:15 PM by Okonomen »


Okonomen

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Re: TECD - Tech Data
« Reply #1 on: October 01, 2018, 01:41:42 PM »
bump : ) nobody's looked at this company ??

writser

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Re: TECD - Tech Data
« Reply #2 on: October 01, 2018, 03:06:48 PM »
bump : ) nobody's looked at this company ??

Usually that's a good sign :) .

I took a quick look but don't have anything sensible to add. Looks cheapish but not no-brainer cheap. Consider me skeptical regarding the huge acquisition.
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mjohn707

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Re: TECD - Tech Data
« Reply #3 on: October 01, 2018, 03:29:35 PM »
It's on my list too, will take a look
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Okonomen

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Re: TECD - Tech Data
« Reply #4 on: October 01, 2018, 11:38:44 PM »
@writser : Funny that you say that. That was also my conclusion when nobody seemed to be interested : ) I am also a bit sceptical on the M&A but I am always sceptical on M&A. I hate it. However, TS was purchased some time ago now and the scepticism should be baked in by now, and I acknowledge that there should be a lot of potential in TS  and synergy effects. Moreover, afaik TS and Tech Data uses same ERP making integration a lot smoother.


I am more concerned about the dependancy on tech cycles, potentially intensifying competition and on Apple's supplier power

Okonomen

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Re: TECD - Tech Data
« Reply #5 on: October 02, 2018, 11:14:40 AM »
They announced a 200 mUSD buyback today. That's 7% of total shares. That would make up for the dilution ; )

Okonomen

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Re: TECD - Tech Data
« Reply #6 on: December 02, 2018, 07:16:34 AM »
Great results announced this week and they have already bought back 44 mUSD worth of stock

Okonomen

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Re: TECD - Tech Data
« Reply #7 on: August 10, 2019, 02:13:42 AM »
Still nobody who's interested in this company?

Trades at around 90 USD/share now. 7x earnings, 5,5x EV/EBIT. Buying back lots of shares

Spekulatius

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Re: TECD - Tech Data
« Reply #8 on: August 10, 2019, 12:13:51 PM »
It trades similar to other distributor companies like AVT, ARW or AXE. Either they are all cheap, or none is. I would tend to believe they are all a bit cheap.
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Okonomen

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Re: TECD - Tech Data
« Reply #9 on: August 10, 2019, 02:04:02 PM »
It trades similar to other distributor companies like AVT, ARW or AXE. Either they are all cheap, or none is. I would tend to believe they are all a bit cheap.

Yes since they are distributors in a quite commoditized industry valuations are low in general. However, as I write in my initial post I see TECD as a clear market leader and as the most efficient player. they have a disgustingly keen focus on costs and ROIC. I really like it despite the industry being brutal. I look at TECD more on an absolute basis. I don't like relative comparisons on valuation. Only on financial performance. Would just be interesting to hear if anyone had taken a deep look as well who maybe could present a bear thesis or some red flags other than what i found