Rating Update: Stock Rating A-Highest (9/10/19)-Tech Data Corp (TECD).

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BUSINESS

Tech Data Corporation engages in the wholesale distribution of technology products. It offers endpoint portfolio solutions, including PC systems, mobile phones and accessories, printers, peripherals, supplies, endpoint technology software, and consumer electronics; and advanced portfolio solutions, such as storage, networking, servers, advanced technology software, and converged and hyper-converged infrastructure, as well as specialized solutions. The company serves value-added resellers, direct marketers, retailers, and corporate resellers. Tech Data Corporation sells its products to customers in approximately 100 countries in North America, South America, Europe, the Middle East, Africa, and the Asia-Pacific. The company was founded in 1974 and is headquartered in Clearwater, Florida.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, TECD is expected to continue to be an important Value Builder.

Tech Data has a current Value Trend Rating of A (Highest Rating).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Tech Data has a neutral Power Rating of 55 but a good Appreciation Score of 81, producing the Highest Value Trend Rating.

Tech Data’s stock is selling well below targeted value. The current stock price of $104.43 compares to targeted value 12 months forward of $223.
Tech Data’s high appreciation potential results in an appreciation score of 81 (only 19% of the universe has greater appreciation potential.)
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Tech Data has a Power Rating of 55. (This neutral Power Rating indicates that TECD’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for TECD has been slightly favorable recently; and recent price action has been neutral. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

Tech Data’s financial strength is above average. Financial strength rating is 62.
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Relative to the S&P 500 Composite, Tech Data Corp has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that TECD is normal risk. Low financial leverage is a positive for Tech Data. Relative weaknesses include: low historical profitability, low financial strength, and low historical growth. Tech Data’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. TECD has unusually low market capitalization.

CURRENT SIGNALS

Tech Data’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Tech Data’s current technical position is mixed. The stock price is in a 4.4 month down move. The stock has declined 17.3% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average. The stock has just risen above its 200 day moving average.

ALERTS

Significant positive changes in investment behavior have recently occurred for Tech Data Corp (NASDAQ: TECD): the stock’s recent price rise disrupted its longer term downtrend.
Tech Data Corp (NASDAQ: TECD). Notable positive changes in fundamentals have recently occurred: the consensus estimate for January, 2020 increased significantly, the consensus estimate for January, 2019 increased significantly, and significant quarterly earnings acceleration occurred.
The stock is currently rated A.
On 9/10/19, Tech Data Corp (NASDAQ: TECD) stock enjoyed a major increase of 15.2%, closing at $0.75. Trading volume in this advance was normal. The stock has performed in line with the market over the last nine months and has risen 12.6% during the last week.

CASH FLOW

In 2019, Tech Data experienced a significant decline in cash of -$156.5 million (-16%). Sources of cash were lower than uses. Cash generated from 2019 EBITDA totalled +$766.0 million. Non-operating uses consumed -$127.0 million (-17% of EBITDA). Cash taxes consumed -$32.7 million (-4% of EBITDA). Re-investment in the business amounted to -$103.7 million (-14% of EBITDA). On a net basis, debt investors removed -$333.7 million (-44% of EBITDA) while equity investors pulled out -$325.3 million (-42% of EBITDA).
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Tech Data’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Tech Data Corp Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Tech Data was in the third quartile and second quartile. Currently, Tech Data is slightly below median at -17% of EBITDA (-$127.0 million).

Tech Data’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Tech Data Corp Peer Group. In most years, Tech Data was in the second quartile and top quartile. Currently, Tech Data is at the upper quartile at -4% of EBITDA (-$32.7 million).

Tech Data’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Tech Data Corp Peer Group. In most years, Tech Data was in the top quartile and lower quartile. Currently, Tech Data is above median at -14% of EBITDA (-$103.7 million).

Tech Data’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Tech Data Corp Peer Group. (Since 2017 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Tech Data was in the top quartile and third quartile. Currently, Tech Data is substantially below median at -44% of EBITDA (-$333.7 million).

Tech Data’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Tech Data Corp Peer Group. In most years, Tech Data was in the top quartile and lower quartile. Currently, Tech Data is substantially below median at -42% of EBITDA (-$325.3 million).

Tech Data’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Tech Data Corp Peer Group. In most years, Tech Data was in the lower quartile and top quartile. Currently, Tech Data is lower quartile at -20% of EBITDA (-$156.5 million).
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Tech Data’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Tech Data Corp Peer Group as well. In most years, Tech Data was in the third quartile. Currently, Tech Data is below median at +2%.

PROFITABILITY

Tech Data’s return on equity has been stable since 2010 even as it experienced very sharp improvement from the 2017 level.
This stability was due to very strong negative trend in pretax operating return offset by strong positive trend in non-operating factors.
The productivity of Tech Data’s assets declined over the full period 2010-2019: asset turnover has suffered a strong overall downtrend that acccelerated very sharply after the 2014 level.
Additionally, pretax margin has exhibited little to no overall change although it experienced very sharp improvement from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Tech Data’s return on equity is upper quartile (12.7%) for the four quarters ended July, 2019.
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Operating performance (pretax return on assets) is slightly below median (3.5%) reflecting asset turnover that is upper quartile (3.09X) and below median pretax margin (1.1%).
Tax “keep” rate (income tax management) is at the upper quartile (86.6%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is upper quartile (4.17X).

GROWTH RATES

There are no significant differences between Tech Data’s longer term growth and growth in recent years.
Tech Data’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 7.8% per year.

Total asset growth has been 11.3% per year.

Annual E.P.S. growth has been 7.8% per year.

Equity growth has been 6.8% per year.

Tech Data’s consensus growth rate forecast (average of Wall Street analysts) is 8.9% — in line with the average of the historical growth measures.
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Relative to the Tech Data Corp Peer Group, Tech Data’s historical growth measures are erratic. Total asset growth (11.3%) has been at the upper quartile. Revenue growth (7.8%) has been above median. E.P.S. growth (7.8%) has been substantially above median. Equity growth (6.8%) has been below median.

Consensus growth forecast (8.9%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, Tech Data’s stock price performance has been variable and superior. Between November, 2008 and September, 2019, Tech Data’s stock price rose +499%; relative to the market, this was a +80% gain. Significant price moves during the period: 1) November, 2012 – August, 2017: +150%; and 2) February, 2009 – December, 2009: +170%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 21.5% is substantially above median relative to the S&P 500 Composite.
In addition to being substantially above median relative to S&P 500 Composite, current annual total return performance through July, 2019 of 21.5% is at the upper quartile relative to Tech Data Corp Peer Group.

Current 5-year total return performance of 10.0% is slightly below median relative to the S&P 500 Composite.
Through July, 2019, with slightly below median current 5-year total return of 10.0% relative to S&P 500 Composite, Tech Data’s total return performance is substantially above median relative to Tech Data Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TECD’s overall valuation is exceptionally low. All five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the price/equity ratio, then by the ratio of enterprise value/assets. The lowest factor is the ratio of enterprise value/revenue.

Relative to Tech Data Corp Peer Group, TECD’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/equity ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/earnings ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.
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Tech Data has a major value gap compared to the median. For TECD to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.12X to 0.29X. If TECD’s ratio of enterprise value/revenue were to rise to 0.29X, its stock price would be higher by $176 to $281.
For TECD to achieve upper quartile valuation relative to the Tech Data Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.12X to 0.35X. If TECD’s ratio of enterprise value/revenue were to rise to 0.35X, its stock price would increase by $232 from the current level of $104.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, TECD is expected to continue to be an important Value Builder.
Tech Data’s current Price Target of $222 represents a +112% change from the current price of $104.43.
This high appreciation potential results in an appreciation score of 81 (only 19% of the universe has greater appreciation potential.)
With this high Appreciation Score of 81, the neutral Power Rating of 55 results in an Value Trend Rating of A.
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Tech Data’s current Price Target is $222 (+35% from the 2019 Target of $163 and +112% from the 09/10/19 price of $104.43). This dramatic rise in the Target is the result of a +6% increase in the equity base and a +28% increase in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 15.1% — slightly above our recent forecasts. Forecasted return on equity erratic but little changed between 2011 and 2019. The current forecast is well above the 2017 low of 9%.

PTR’s growth forecast is 6.0% — slightly below our recent forecasts. Forecasted growth exhibited a modest, erratic decline between 2011 and 2019. The current forecast is above the 2017 low of 3%.

PTR’s cost of equity forecast is 8.7% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2011 and 2019. The current forecast is steady at the 2011 low of 6.8%.
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At Tech Data’s current price of $104.43, investors are placing a negative value of $-16 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 11.3% versus a cost of equity of 8.1%.
PTR’s 2021 Price Target of $222 is based on these forecasts and reflects an estimated value of existing assets of $143 and a value of future investments of $79.

About John Lafferty 52629 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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