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Wall Street upbeat about Tech Data

The technology distributor is becoming the market's idea of what a tech company should be these days: slow and steady.

Tech Data is becoming Wall Street's idea of what a tech company should be these days--slow and steady.

The company, which distributes technology products such as PCs, reported first-quarter earnings of 57 cents a share Wednesday to easily top First Call estimates, but told analysts to cut their earnings projections for future quarters. Nevertheless, investors cheered.

Shares jumped about 7 percent Thursday, regaining half the stock's losses from the previous session. People have good reason to feel comfortable with Tech Data these days, analysts said, because its performance has been about as reliable as investors can expect.

Weak demand in the technology market is anything but a surprise these days, and Tech Data is no exception. Company executives expect more declines in the United States, as well as softness in other parts of the world. Among other things, Tech Data, like other technology companies, sees European weakness. Bottom line: Tech Data sees second-quarter earnings between 39 cents a share and 45 cents a share, compared to a First Call estimate of 51 cents a share.

"We are keeping more or less the same rate of decline that we saw in Q1," Tech Data President Nestor Cano said during a conference call with analysts. "It doesn't seem it's getting worse, (but) it's not getting better."

That assessment counts as good news these days.

Investment firms cut earnings estimates for Tech Data after company executives said demand wouldn't rebound anytime soon. There were no upgrades in the First Call research notes released after Tech Data's quarterly conference call this week, so the company's average rating of "hold" didn't improve.

But analysts were upbeat about the company.

At least nine analysts issued reports after Tech Data told Wall Street to lower expectations for the company's fiscal first quarter, which ends July 31. Morgan Stanley analyst Shelby A. Fleck's summary was typical: "Tech Data seems to be doing the right things in a very tough environment."

Fleck wasn't alone.

"Tech Data is the best managed, lowest cost company in an industry that is experiencing its best ever secular dynamics, outside of the state of the economy," Merrill Lynch analyst Steven Fortuna wrote. "Despite the current industry weakness, we continue to believe that Tech Data is extremely well positioned to benefit from the return of demand."

When that demand returns is anyone's guess, but a soft market isn't a shock anymore. Tech Data merely confirmed what everyone already knows.

"Revenues in the U.S. were down 7 percent year over year, due primarily to a sharp drop off in orders from corporate resellers that service Fortune 1000 accounts," Thomas Weisel Partners analyst Matthew Sheerin noted in a research note released Thursday. "This confirms our belief that corporate IT budgets are still under lock-and-key."

The more significant factor is how a company responds to weakness. Tech Data is thriving on that front.

Tech Data's fourth-quarter earnings of $31.8 million, or 57 cents per share, topped the First Call analyst-consensus estimate by 6 cents per share. Revenue was down from a year ago, but still in line with expectations at $4.68 billion. The company boosted gross margins to 5.37 percent from 5.24 percent in the previous three-month period. Sales, general and administrative expenses fell to 3.84 percent of revenue. And Tech Data lowered its inventory--always a concern for a distributor in any industry--while beating profit forecasts.

That's why Wall Street was so optimistic about Tech Data on Thursday.

The company's ability to protect the bottom line would mean little if the stock were expensive, but several anlysts noted that Tech Data this week was trading at about 14 times estimated earnings for the next 12 months, which would be in the middle of its historical trading range.

Tech Data in the past has been valued between eight and 21 times its estimated earnings for the year, Salomon Smith Barney analyst Richard Gardner pointed out.

"Although we do not expect them to revisit the high end of this range, a 14 multiple to calendar 2002 earnings estimates does not seem rich for a company with 10 (percent) to 15 percent (growth on the) top line and 15 (percent) to 20 percent bottom-line growth in a better economic climate," Gardner said.