is the "middleman" between technology companies and their largest customers. The company is the world's largest computer wholesaler, serving more than 150,000 customers, including
, which have a sizable presence both at home and overseas.
At Tuesday's closing price of $21.70, Ingram Micro shares are up 6.3% year to date, which is slightly ahead of the performance benchmark
. Even so, the company is valued at just 12.8 times expected 2007 earnings of $1.69 a share. This represents the second straight year of single-digit annual earnings growth after four straight years of 40%-plus year-over-year earnings improvement.
Still, Ingram Micro is currently trading at a 20% discount to the S&P 500 and a 37% discount to the company's historical average valuation.
With that in mind, I'm here to answer readers' questions: Should you buy it? Are shares of Ingram Micro a good buy at current levels, or should investors look elsewhere along the computer supply chain?
Ingram Micro was upgraded Monday by Citigroup to a buy rating from hold. The analyst cited accelerating end-market demand for PCs as well as
push to seek more deals with distributors and retailers.
Even so, Ingram Micro posted mixed first-quarter results April 26. The company earned 38 cents a share, which was a penny worse than expectations. Revenue grew 8.5% from the previous year, to $8.25 billion, which was $40 million ahead of the consensus analyst estimate.
At an analyst meeting earlier this month, Ingram guided to 7% to 10% annual revenue growth over the next three to five years, which would take Ingram Micro up to $40 billion of annual revenue by 2009.
This will include organic growth by offering a wider range of technology products and services to customers, and may also require acquisitions to grow its sales base enough to reach the targets.
Management is also targeting growing operating margin to 1.5% by 2009, from 1.3% reported in the first quarter of 2007. Wholesalers generally earn lower margins, but to put Ingram's anemic profitability into perspective, the average operating margin over the past four quarters for companies in the S&P 500 was 19.5%.
A major portion of this strategy is focused on international growth, and the company already generates about 60% of its sales overseas (both from U.S.-based multinational firms and from customers in the local countries), which makes it a beneficiary of a weak dollar.
On the other hand, I'm not bullish on Ingram Micro at current levels because it does not give back any cash to investors in the forms of a dividend or see enough value in its own stock to institute a buyback program. One reason could be the company's balance sheet, which carries twice as much total debt as the $300 million of cash that Ingram Micro has on hand.
There's also the fact the company received a Wells notice from the
Securities and Exchange Commission
last month, for an investigation ongoing since 2004. The Wells notice means the SEC has found infractions in Ingram Micro's records and that it may file civil charges against the company.
I believe that readers should not buy Ingram Micro at current levels. The company's high single-digit revenue growth is dependent on solid domestic information technology spending, at a time when U.S. economic growth is slowing. Even if management does achieve its sales growth target, I don't believe that Ingram Micro will be able to improve the razor-thin operating margins by enough to achieve meaningful earnings growth.
With that in mind, the company likely will continue to trade at a discount to the broader market, and I believe there are better buys out there than Ingram Micro.
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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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