Tech Industry

Tech Data&#039&#039s warning sparks Europe worries

Tech Data's outlook for the first quarter raised doubts about Europe's economic health and sparked some concern on Wall Street Thursday.

The distributor topped estimates for the fourth quarter, but sounded a few warning bells for the first quarter and cut its outlook partly based on a slowdown in Europe. Analysts were positive about the company's long-term prospects, but cautioned that Tech Data's outlook could signal problems for the tech sector.

Tech Data (Nasdaq: TECD) met estimates for the fourth quarter, but said it will miss first-quarter estimates. The company said it now expects first-quarter sales of between $4.6 billion and $4.8 billion and earnings between 45 cents and 53 cents a share. First Call had been expecting a profit of 74 cents a share.

Shares were were up 13 cents to $26.44 Thursday morning.

Tech Data said the U.S. economy dinged sales, but said early signs of weakness in Europe are to blame for its outlook for the current quarter.

"While international demand is stable right now, we believe it should turn slightly negative, as slowing in IT spending has indeed spread to international markets," J.P. Morgan analyst Walter J. Winnitzki wrote in a research note.

Winnitzki said Tech Data is a "leading edge barometer for end market demand," and could signal weakness ahead not only for other distributors, like rival Ingram Micro (NYSE: IM), but also the companies whose products it distributes. "Tech Data's growth prospects are closely tied to the end-user demand for these products," Winnitzki wrote.

Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP) together account for about 35 percent Tech Data's sales. Hewlett-Packard CEO Carly Fiorina recently said U.S. economic weakness is spreading to Europe.

Winnitzki kept his "long-term buy" rating and $40 price target on Tech Data's stock and said its prospects are good.

"Inventories are in good shape," Winnitzki noted. Though product margins likely to drop near-term, they could improve later in the year, he added.

Other analysts were also upbeat.

"Tech Data is the best run company in the distribution industry, and we think that in tough times like these, strong companies become stronger and the weak become weaker (and may go away)," wrote Merrill Lynch analyst Steven Fortuna, who reiterated an "accumulate" rating.

First Union International analyst William Cage, who maintained a "buy" rating and $35 price target also said the difficult environment could help distinguish Tech Data from the competition. "Over the long term the difficult margin environment could actually benefit both Tech Data and Ingram Micro as the continued financial devastation of weaker competitors causes more vendors to further consolidate," Cage said.
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