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2HRS2GO: Ingram Micro paints unclear picture

    Too bad you can't force everyone to use the same guidelines for earnings.

    Other companies such as I/B/E/S International and Zack's Investment Research (which supplies financial data for this website) supply consensus earnings estimates, but Wall Street generally acknowledges Thomson Financial's First Call as the standard for the field. If your quarterly results top the First Call number, that's good. If they don't, people ask what's wrong.

    Compiling these estimates is simple in theory. You call analysts, get their quarterly estimates, tally them up and calculate the mean. A seventh-grader can do the math.

    That's in theory. The reality: sometimes it's a damned quagmire.



    Have an opinion on this?



    You're seeing that today with the results of Ingram Micro (NYSE: IM), the world's largest technology distributor. Yesterday afternoon, Ingram Micro reported fourth quarter net income of $75 million, or 51 cents per share, on revenue of $7.8 billion. First Call's published consensus forecast predicted a profit of 24 cents.

    Wow! Ingram more than doubled the estimate, right?

    No.

    Ah, so Ingram's results included a bunch of non-recurring stuff, right?

    Well ... not technically.

    Analyst estimates usually exclude the cost of one-time events, like layoffs, or an unexpected tax benefit. Ingram Micro did report "reorganization" costs of $9.35 million. But with 146.75 million shares outstanding, that reorganization charge accounts for just 6 cents of the disparity between the 51 cents profit reported under Generally Accepted Accounting Principles and the 24 cents First Call estimate.

    So Ingram beat First Call by 21 cents?

    No.

    So what did Ingram do?

    I'm not certain. Neither is anyone else. "We're not sure what Ingram Micro's operating net is," a First Call analyst told me this morning. "We're still waiting to hear back from the analysts so we can see what they're going to use. This is unusual ... Very, very infrequently does this happen."

    What's the big holdup?

    In a nutshell: Ingram didn't record many one-time occurrences -- but it did see a few line items scream to far-larger-than-normal levels.

    Specifically, Ingram's took huge provisions for excess inventory and customer returns. Every company has a bit of that, but it's an especially important figure for distributors like Ingram Micro or Tech Data (Nasdaq: TECD).

    Over the last three years, Ingram Micro has typically covered excess inventory by setting aside between 0.12 and 0.13 percent of sales each quarter. During the same period, the company also covered returned items with an average quarterly provision of .18 to .19 percent of sales.

    In this December quarter, Ingram found itself stuck with unexpectedly large amounts of unwanted stuff. Unsold inventory and returns combined cost the company 1.14 percent of revenue instead of the usual 0.32 percent or so. Ingram also set aside 0.67 percent of revenue to absorb some margin hits caused when the company's suppliers decided to cut compensation.

    Stinks being a middleman, doesn't it? Both suppliers and customers get clawholds on your scrotum.

    Actually, Ingram says it'll focus on companies that pay more. But in the meantime, between all those higher-than-normal charges, Ingram's operations lost 24 cents per share.

    Then where'd the $75 million profit come from?

    Ingram cashed in $125 million by selling 35 percent of its stake in Softbank, which happens to be ZDNet's Big Daddy. That stock sale technically doesn't count as a one-time gain either, even though everyone knows it is.

    Or maybe not -- Ingram made another $69 million in the current quarter from Softbank stock. I suppose sooner or later the stake has to run out.

    But it counts toward earnings for First Call purposes?

    Analysts seem to think so. And an Ingram spokeswoman points out other companies include portfolio results as part of their normal income.

    "You can't say it's a hard and fast rule," says Kim Strohm, vice-president of corporate communications for Ingram. "Microsoft has investment gains for their income statement and it's included in their estimates. Intel has investment gains for their income statement and it's included in their estimates."

    True. On the other hand, Intel got roundly criticized for including stock sales as part of their bottom line in the latest quarterly report. But anyway...

    So if you include the stock gains and back out the unusually high provisions, what's Ingram's bottom line?

    Like I said, First Call doesn't know yet. But Ingram Micro this morning told me analysts are generally coming up with figures between 20 cents and 25 cents, with a probable consensus of 23 cents. Or a penny below estimates.

    It's fuzzy because analysts are guessing what Ingram would have set aside in a normal quarter. At least one research firm, Banc of America Securities, pegs fourth quarter earnings at an even lower 17 cents per share.

    Hmm. Not encouraging.

    Wall Street doesn't like it either. IM stock is down 3 3/4 as of early this afternoon. Credit rating firm Fitch Ibca cut Ingram Micro's unsecured debt rating to BBB- from BBB+. BofA Securities slashed IM to "market performer" from a "buy" rating.

    Fitch says Ingram is the victim of a price war. BofA analyst Kurt King is worried about a ship with no captain.

    "After yesterday’s results we’re more concerned than before that continued management departures have left Ingram without the tight controls required to perform optimally in the thin-margin distribution business," write King and associate Jason Wells in a research note released this morning. "Despite Ingram’s continued industry leadership and the potential for improvement to operations going forward, we’re stepping to the sidelines pending improved visibility and a rebuild of the management team. We’re especially waiting for the appointment of a new CEO."

    Ingram Micro says it will raise prices, but King notes the company can't predict margins with any certainty.

    Missed quarter. No long-term CEO. Little visibility about the past quarter, let alone future ones. Yeah, it definitely stinks to be this middleman right now.

    Other issues:

  • Synopsys
  • (Nasdaq: SNPS) The chip design automation specialist has lost half its market cap in the last three months, so the last thing it needed was more bad news. But yesterday the CFO quit and the company told Wall Street to lower expectations for the next two fiscal years.

    Four brokerage firms responded with lower stock ratings. As if Synopsys shareholders didn't already know things were bad.

    Credit Needham & Co. analyst John Barr for contrarian thinking. Barr today upgraded Synopsys to a "strong buy" from a "buy" rating, citing five reasons:

    - The bad news has been priced out.

    - The company's Physical Compiler product is a kick-ass offering.

    - CEO Aart DeGeus knows what he's doing.

    - Quiet progress on an Internet business model.

    - It's cheap.

    I don't know if Barr is right, but at least he's different. Makes more interesting reading than another after-the-fact downgrade. 22GO>