PCs May Be Back, but Ingram Is Back From the Dead

While the boxmakers' revival may be short-lived, Ingram's CEO is gearing up for the long haul.
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Every Wall Street pro knows that it usually takes a surge of momentum to get a value stock rallying these days.

Ingram Micro

(IM)

is a prime example of one that is just breaking out of its value-encrusted shell.

Ingram's stock has risen 24% in the past week as investors are waking up to its prospects. "It's a beautiful thing to watch," says Paul Meeks, a fund manager with

Merrill Lynch Asset Management

who has doubled his position in the stock during the last week. "The stock's been trading on heavy volume and just punched through its 200-day moving average. Hopefully, this will get all those momentum boys back."

Ingram, the world's largest computer distributor of everything from PCs to

Cisco

(CSCO) - Get Report

routers, had zero momentum six months ago when price-cutting rivals put such margin pressure on Ingram and the No. 2 computer distributor,

Tech Data

(TECD) - Get Report

, that Ingram was forced to preannounce in its last two quarters.

Ingram's stock dropped from 54 in early October to 16 in late March as Wall Street saw the computer distribution sector as an outmoded industry, one that the e-commerce revolution would pass by. But now analysts and buy-siders see an undervalued stock. Its price-to-sales ratio is .18; anything under one is attractive. They also see Ingram's dominant position outside the U.S. and, finally, its developing e-commerce strategy.

Ingram took its modus operandi straight from

IBM

(IBM) - Get Report

: It sews up its relationships with major partners over the long term. Last week, it signed a five-year deal with

CompUSA

(CPU)

, which will outsource an estimated $10 billion in product fulfillment to Ingram. Ingram CEO Jerre Stead boasts that the company has eight more partnership deals in the works this year, and "a couple are similar in scope to the CompUSA deal."

Next month,

Compaq

(CPQ)

will start to pare down its distributor roster from 40 to four. Ingram is one of the four remaining.

Credit Suisse First Boston

analyst Joel Pitt estimates Ingram could receive 60% of the $4 billion to $6 billion of extra work that the four distributors will get in the next year because of Ingram's close ties to Compaq.

"The CompUSA deal should add another $700 million to $800 million to Ingram's revenue in the next year as well," says Pitt, who has a buy rating. CS First Boston has done no underwriting for Ingram.

Ingram's Stead Sees An e-Future

The problem for the Santa Ana, Calif.-based company so far this year has been declining gross margins, which have slipped from 5.8% in January to an anemic 5.3%, Pitt estimates. Net margins are languishing between 1% and 1.5%. That still scares the Street. "I like Ingram's management but I don't know if this industry can still execute operationally," says one money manager, who requested anonymity and who has no position in Ingram.

Stead told

TheStreet.com

that the company's e-business and international exposure would allow the company to improve margins.

"We are the dominant player internationally and that allows us to have better margins outside the U.S.," says Stead, who took over the head job at Ingram three years ago after time at

Honeywell

and as president of

AT&T's

(T) - Get Report

global business unit.

Stead sees Ingram having more than 50% international sales next year, up from 40% this year. He says e-commerce sales should be about one-fourth of total revenue, or around $8.5 billion in 1999. "Not bad for a boring company like Ingram," notes Pitt. Ingram should also see some upside from the release next year of

Microsoft's

(MSFT) - Get Report

Windows 2000 since it's the exclusive distributor.

Working against a "tremendously high" wall of worry, Stead says he began articulating his company's outlook in May at an analyst meeting. Analysts still seem to be concerned: 1999 earnings estimates of $1.62 are four cents below 1998's results.

Most promising to Ingram in 1999 is the trend for Compaq and other tech companies to outsource their services to companies such as Ingram and Tech Data, which just landed a three-year fulfillment contract with

General Electric

(GE) - Get Report

.

"It looks like there is a trend to resell outsourcing and the two top dogs, Ingram and Tech Data, will be big beneficiaries," says Merrill's Meeks, who manages

(MAGTX)

Merrill Lynch Global Technology Fund and

(MATCX)

Merrill Lynch Technology Fund, which together hold more than a million shares of Ingram stock.

"This is still considered a transition year for Ingram by the Street, with next year being its break-out year," says Meeks. "I believe the party has already started."