Ingram Shares Rise Despite Muted 2Q - Analyst Blog
July 29 2011 - 7:15AM
Zacks
Ingram Micro Inc.
(IM) has reported second-quarter 2011 earnings per share of 37
cents, just matching the Zacks Consensus Estimate. However, the
quarter’s results were 9.8% below the year-ago level. Management
held transitional difficulties to a new enterprise system in
Australia responsible for the lackluster performance. But shares
jumped 12.79% in after-market trade, which could be due to
management’s commentary that it has already resolved the Australian
issue to some extent during the quarter.
Revenues
Ingram Micro’s second quarter
revenues of $8.75 billion increased 7.3% from $8.16 billion in the
year-ago quarter. The improvement may be attributed to modest sales
growth across all geographic regions and improving Information
Technology (IT) spending. Foreign currency translation had a 6%
positive impact on revenues.
Revenue contribution from North
America increased 5.7% year over year to $3.76 billion. Europe,
Middle East and Africa (EMEA) contributed $2.64 billion, up 11.3%
from the year-ago quarter. European currency translation had a
positive impact on regional revenue.
The Asia-Pacific region generated
$1.96 billion in sales, up 5.1% from $1.87 billion in the second
quarter of 2010. Foreign currency translation had an 8% positive
impact on revenues. Latin America sales grew 7.4% year over year to
$386.6 million, benefiting from a positive translation impact of 6%
from relatively stronger regional currencies.
Operating
Results
Gross profit grew a modest 5.0% to
$459.2 million in the reported quarter from $437.4 million in the
year-ago quarter. However, the gross margin dropped 20 basis points
(bps) year over year to 5.2%. The difference could be traced back
to operational interruptions at the new enterprise system in
Australia, competitive pricing in some Asian markets, subdued
retail demand in Europe and Asia-Pacific, and a higher mix of
emerging markets revenue that typically carry lower margins.
Selling, general and administrative
expenses were $362.1 million, up 8.7% from $333.1 million in the
year-ago quarter. The increase was due to higher compensation
expenses, investments in system enhancements and growth
initiatives. Moreover, translation of stronger foreign currencies
had an adverse effect on operating expenses.
Operating profit was $97.1 million,
compared to $104.5 million in the prior-year quarter. Operating
margin in the quarter decreased 20 bps year over year to 1.1%.
Ingram Micro reported a net income
of $59.7 million, or 37 cents per share, compared to $67.7 million,
or 41 cents in the year-ago quarter. There was no one-time item
recorded during the quarter.
Balance Sheet and Share
Repurchase
Ingram Micro exited the second
quarter with cash and cash equivalents of $1.38 billion, up from
$1.02 billion in the previous quarter. Accounts receivable
decreased 4.0% sequentially to $3.59 billion. Inventories were
$3.08 billion, up from $3.03 billion in the prior quarter. Total
debt balance was $642.6 million, down from $657.0 million in the
previous quarter.
Ingram Micro paid $75.0 million to
buy back 4.0 million shares during the quarter. Ingram also
purchased an additional 4.2 million shares for $75.0 million during
this month.
Guidance
Ingram Micro did not provide any
specific guidance for the third quarter of 2011 but expects sales
to grow sequentially based on historical trends. However, sales
could grow on a year-over-year basis, given consistent demand
trends. Management expects the transitional issue to be over by the
next quarter, which could lead to a market share gain in Australia.
But, the company would take time to regain the full momentum in its
Australian business.
The company also expects the gross
margin to decline sequentially following competitive pressure in
the Asia-Pacific region and softer retail demand in Europe. Ingram
Micro also stated that operating expenses may fluctuate, despite
cost control measures, due to continuous strategic investments.
Based on the improving IT spending
trend, increasing global demand for its products and the completion
target of the ERP (enterprise resource planning) system
implementation in Australia within the coming three years, Ingram
Micro is confident about achieving operational excellence going
ahead.
Conclusion
We find Ingram Micro’s second
quarter results unimpressive as the bottom line was just in line
with the Zacks Consensus Estimate. Ongoing softness in the retail
sector in Europe and Asia-Pacific regions as well as the transition
issue has constrained Ingram from providing an encouraging
guidance. Though management is quite positive about having resolved
most of the issues in this quarter and has assured that it will
regain market share in Australia, we would prefer to take a
cautious stance on the stock.
Despite the uneventful quarter, we
remain fairly optimistic about Ingram Micro’s strategic
relationship with network giant Juniper Networks
Inc. (JNPR), as well as tech giants, such as
Hewlett-Packard Company (HPQ),
International Business Machines Inc. (IBM) and
Microsoft Corp. (MSFT).
Ingram Micro’s high dependency on
IT spending is a concern. Though we remain positive about corporate
IT spending, which should see a slow but steady recovery through
2011, a slowing consumer spending cannot be ignored. The company’s
significant European exposure and debt burden are also
concerns.
Currently, Ingram Micro has a Zacks
#4 Rank, implying a short-term Sell rating.
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