Tech Data (TECH) on a Tear Since Q1 Earnings: Here's Why

Shares of Tech Data Corp. TECD rose 6.7% since the release of first-quarter fiscal 2019 results on May 31. Although earnings deteriorated 1.6% on a year-over-year basis, investors were encouraged by a bottom-line beat after a miss in the preceding quarter. Further, sales surpassed the Zacks Consensus Estimate for the fifth straight quarter. On top of it, a solid second-quarter guidance buoys optimism.

As a result, the company’s shares have gained 11.5%, outperforming the industry’s gain of 9.8% in the past month.

We believe that Tech Data is positioning itself well to achieve strong growth based on increasing demand for data center systems, cloud and mobility offerings in the long run. The company’s efforts to diversify into new domains are significantly positive. The higher level of spending in these areas is expected to drive revenue growth for Tech Data as the company consolidates its position in the fast-growing domain of data center, mobile technology, software and integrated supply chain.

 

A Brief Synopsis of Q1

Tech Data, which shares space with PC Connection, Inc. CNXN, reported first-quarter adjusted earnings of $1.84 per share, which not only exceeded its own expectation of $1.30-$1.60 but also surpassed the Zacks Consensus Estimate of $1.48. Notably, the company has exceeded the Zacks Consensus Estimate in five of the trailing seven quarters.

Revenues of $8,548 million increased 21.7% year over year and beat the consensus mark of $8,183 million, driven by favorable foreign currency exchange rates and an additional month of Technology Solutions' ("TS") sales.  Net sales rose 13% on a constant-currency basis.

This Zacks Rank #3 (Hold) company generated 14% of sales in the quarter from Apple AAPL. HP Inc. HPQ and Cisco represented 12% and 11% of net sales, respectively.

For the fiscal second quarter, Tech Data forecasts net sales of $8.6-$8.9 billion compared with $8.9 billion reported in the second quarter of fiscal 2017.

Adjusted earnings per share are anticipated in the band of $1.95-$2.25 compared with $174 in the year-ago period.

Factors That Could Limit Growth Potential

Although, gross profit increased 14% to $523.1 million in the fiscal first quarter, gross margin contracted 39 basis points (bps) from the year-ago quarter to 6.1%. Adjusted operating margin contracted 30 bps to 1.5%.

We are concerned about aggressive industry pricing in the indirect channel, which has intensified, resulting in lower gross margins and more competitive conditions. This apart, low growth and margin of the tech distribution business can also be a drag on the company’s financials. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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