Beating Buffett

Ingram Micro Inc. – A Global Leader at a Bargain Price

Mr. Market has strange habits. He can shower a company with love or treat that same firm like dirt; often just months apart. Even more frustrating can be his lack of a good reason for being so fickle.

Case in point: Ingram Micro, the world’s largest wholesale distributor of computer products and related services. IM posted all-time high revenues of more than $36 billion in 2011. It is something of a proxy for the overall worldwide comsumption of intelligent electronics. IM serves greater than 170,000 (reseller) customers spread over more than 100 countries.

The past decade was a good one for IM. Here are their per-share numbers in some key categories as reported by Value Line. EPS exclude non-recurring items.

Like many technology-related companies IM saw its P/E and absolute price contract despite posting excellent results. Ingram Micro is net debt-free. As of June 30, 2012 they held $981.2 million in treasury cash against just $143 million in ST and $320 million in LT debt.

Consensus estimates for 2012 and 2013 now run $1.84 and $2.03 respectively. That puts IM at just 8.3x this year’s and 7.5x earnings about 18 months out. How cheap is that? Standard and Poors provides an interesting bit of data on each of the stocks they follow. It’s the annual high and low P/E at the company’s high and low share price during each calendar year.

The interesting takeaway from the S&P data was that IM traded for at least 10x operating earnings at some point in every year listed. In six of the other recent years it touched 14x or greater when trading at its yearly peak.

Today’s valuation is right at the absolute bottom for the past three years; something you can clearly see from the following graph. The absolute price of $15.21 is lower than the 2011 nadir and within shouting distance of the fleeting bottoms touched in 2010 and 2012 YTD. Meanwhile, book value and revenues per share have reached all-time highs.

I invest on fundamentals. Many others prefer to use technical analysis such as support and resistance zones. To some degree their actions becomes self-fulfilling. On that basis it’s nice to know that IM has shown strong buying support right around present levels over the past 40 months. Conversely, rallies have stalled in the $19 - $22 range.

That might be contributing to S&P’s somewhat conservative12-month target price of $18. That’s a respectable 18.3% above last week’s closing price and below the actual high points achieved during each of the past eleven years.

Morningstar is more in line with my viewpoint. They rate IM with 4-stars (out of 5) and see ‘fair value’ as 51% above the current quote.

$23 seems eminently reachable for those with a 1 – 2 year time horizon. It represents less than 11.4x next year’s estimate. Ingram Micro peaked at $21.60 in April 2011 on what turned out to be full year EPS of $1.73.

Price / book value ratios at the last three calendar year highs were 0.93x, 0.99x and 0.88x. Year end 2012 book value is expected to be $22.75 /share. A minimum price goal of $20.50 or better seems reasonable on that basis.

Value Line notes IM’s 85^th percentile ranking for stock price stability and 80^th percentile score for earnings predictability (100^th is best). Value Line calculates IM’s 10-year median multiple as 12. They assume that will still be normal in making their 3 – 5 year projected price range for IM of $30 -$45.

If you do buy IM the main decision may be whether to lock in gains the next time the shares hit $18 - $20 or to wait for the reachable $22 - $25 price that can be easily justified.

I’m planning to sell half my position at that first level while holding on to the rest for the full ride.

Disclosure: Long Ingram Micro shares

IM [$16.91] showed $0.41 for their June quarter versus $0.20 in 2009 and guided for $0.41 for Q3 against last year’s $0.29. Zacks recently raised it full year EPS goal to $1.87 /share. Current expectations for 2011 are running $2.07.

That puts IM’s multiple at just 9x this year’s and 8.2x 2011’s earnings – about the lowest valuations ever for this world leader in wholesale distribution of computer products and services.

The shares bottomed below $15 just a few weeks ago and now are in a clear uptrend again. With both the 2010 and 2011 estimates at all-time record levels I see no reason why IM can’t exceed its old highs from 2004 – 2008 when it peaked each year between $20 and $22.50.

I’m willing to play for a move to at least $20 by March 19, 2011 by putting on this buy/write combination:

If Ingram Micro moves up to $20 or better [+18.3%] by March 19, 2011:

·         The calls will be exercised and the puts will expire.

·         You will sell your shares for $20,000.

This best-case scenario would result in a profit of $20,000 - $13,110 = $6,890.

$6,890/$13,110 = + 52.5%

Achieved in just 7.5 months on shares that only needed to rise by  at 18.3%.

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Three of the world’s top wholesale distributors of electronic components are going for peanuts due to the market sell-off since April.  All of them have been posting exceptionally good quarterly numbers and analysts have been raising estimates. Each of these fine companies has a  current P/E well below its own historical median and at a single digit absolute level.

The firms are Avnet, Arrow Electronics and Ingram Micro.

Here is the supporting data:

Distribution is a low margin  business but these companies put up some large top lines. Here are the numbers from 2009 and their CY 2010 estimates.

With nothing but good news I’m using the (hopefully) temporary share price weakness to add to positions.

Disclosure: Author is long AVT,ARW and IM shares and short AVT, ARW and IM options.

Ingram Micro [NYSE:IM - $17.95] is a world leader in the wholesale distribution of computer products and related services with almost $30 billion in 2009 revenues. They serve more than 170,000 resellers in over 100 countries in North America, Europe, Asia/Pacific regions and Latin America.

IM recently reported better than expected results for their Q4 [ended Dec. 31, 2009] after also posting year-over-year gains in their third quarter. Estimates have been ramping upwards. Consensus estimates now see 2010 – 2011 EPS at $1.70 and $1.94 respectively.

This is especially good news as earnings from continuing operations had remained flat at $1.56 from 2006 through 2008 before declining in the first half of 2009. Here are the per share numbers for IM (excluding one-time items) as reported by Value Line:

The 2005 - 2008 plateau in earnings contributed to the contraction in IM’s multiple from > 15x to about 11.6x – 12.8x over most of the period since 2005. I believe the renewed growth will lead to an expansion of their P/E looking forward.

Based on the consensus views for 2010 and 2011 Ingram now sells for only 10.6x this year’s and < 9.3x next year’s expectations. A rebound to even 13 times the 2010 estimate brings me to a 12-month target price of $22.10 or 23.1% above this afternoon’s quote.

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