COMMENTARY -- Time for another episode of "Don't Beat Up The Distributors".
Long-term shareholders of Tech Data (Nasdaq: TECD) have had a rough time over the past three years. For all intents and purposes, TECD stock has done nothing since fall 1997:
Even with this year's market declines, a 3-year investment in an index fund would be further ahead than a TECD holding.
But shares moved up this morning in defiance of today's negative trend. The company reported another strong quarter, which makes Tech Data stand out amid all the bad news coming out of technology firms. And more impressive are the company's future targets.
Tech Data now sees fourth quarter earnings ranging between 84 and 88 cents per share, on revenue of $5.2 billion to $5.3 billion. Until the latest report, First Call consensus predicted a fourth quarter profit of 81 cents per share; analysts adjusted this morning to produce the latest estimate of 86 cents.
Next year, Tech Data anticipates revenue growth of 15 percent and faster earnings growth of 20 percent. While those might not look great for a young, growing hardware or software manufacturer, it's very good for an established, long-time distributor.
Yesterday's conference call was predictably upbeat, with the company seeing strength in all markets. Even the much maligned European market looks better, CEO Steven Raymund said. "The European market is showing some improvement in terms of growth in demand," Raymund told analysts.
In fact, the IT distribution industry is growing faster than the IT market as a whole, CFO Jeffery Howells pointed out.
People are wringing their hands about the PC market, but PCs are not the most vibrant part of the high-tech industry, and haven't been for some time.
One response during the Q&A portion of the conference call illustrated how little the PC market troubles mean to Tech Data. "We're not so active, frankly, with bricks-and-mortar retail, who traditionally buy most of their PC hardware, at least, from the vendors, and buy assorted products from us," Raymund told a buy-side analyst.
Big distributors largely focus on the fatter profit margins from corporate systems -- servers, networking equipment, enterprise software and other higher-end products.
Those items require more support and service, the kind typically provided by the resellers served by Tech Data. Basically, the market's sweet spot falls right into the area of Tech Data and other large distributors.
And those big guys are grabbing market share. Compaq (NYSE: CPQ) might be boosting its direct sales, but the company also is cutting back on the distribution business it inherited earlier this year, forcing hundreds of resellers to find another supplier. Tech Data and Ingram Micro (NYSE: IM) look to be the main beneficiaries, and Raymund believes that will balance out Compaq's direct sales push.
All told, Tech Data looks to be in solid shape. That's not news to anyone paying attention -- the company has long been a consistently well-run organization, with tight cost controls. The company has been benefiting from consolidation in its industry for a couple of years, at least. Heck, even a clueless columnist wrote about it more than a year ago.
People are picking up the company's strengths today, but you might remain nervous, since the stock hasn't retained its gains in recent years. But much of that was the result of relative comparisons; when every dot-trash and wireless-fantasy stock hauls in huge gains, Tech Data looks boring and staid.
Wall Street isn't in a dot-bubble mood anymore, and sentiment in a bearish market favors islands of stable, reliable performance. Like Tech Data. 22GO>