Hi Pat! Re: "I was wondering why the Dell thread is so quiet. Is everyone updating their Christmas list early this year? Merry Christmas, Pat"
Maybe it is quiet because there is not much Dell news this weekend, Kemble is in St. Louis, people played too much on St. Patrick's Day or there is a good basketball game on television. I did read this article tonight on Tech Data and Apple. :)Leigh
fool.com
Tech Data Wins Back Apple
By Richard McCaffery (TMF Gibson)
March 17, 2000
Computer maker Apple (Nasdaq: AAPL) said today that computer products wholesaler Tech Data (Nasdaq: TECD) will become its third U.S. distribution partner, a reverse-move in a market where manufacturers have pared back the number of distributors they use and moved increasingly to the direct sales model.
Apple shares jumped up nearly $3 to $124 1/2 in early trading, however, as investors took the announcement for what it was: Sales at Apple are rocking and Tech Data, a distributor that buys products from more than 1,000 manufacturers and sells them to more than 100,000 retailers worldwide, has unmatched scale. Its only competition in the woebegone computer products distribution industry is industry leader Ingram Micro (NYSE: IM) .
Tech Data shares got a lift as well, moving up more than a point in early trading to about $27. For a company that's watched its stock price drop 42% since July, today's news is like spring rain. Ingram perked up $7/16 to $14 7/16.
It's noteworthy that Apple is now expanding its channel partners after paring them down to two in 1998. Tech Data was one of the companies to get axed -- not because it did anything wrong, just because Apple wanted to streamline its distribution system as part of a plan to reduce inventory and boost profitability. One way to do this, everybody now knows, is to sell products directly, a method that cuts out companies like Tech Data. Computer samurai Dell (Nasdaq: DELL) pioneered the direct sales model, which keeps customers close and boosts margins by eliminating middleman fees.
It's a trend that's picked up speed across the vendor community. In the last 18 months Compaq (NYSE: CPQ) , Hewlett-Packard (NYSE: HWP) , and IBM (NYSE: IBM) have all made similar moves. Compaq, for example, trimmed its distribution partners from nearly 40 to four.
Keep in mind, however, that Dell's real advantage is its ability to execute a direct sales strategy, which is why it doesn't mind telling everyone about it. Selling direct is easier said than done. It requires high levels of customer support, increasingly sophisticated information systems, and, for companies like Compaq that have long histories selling through the sales channel, a balancing act to keep from ruffling feathers. Think CompUSA (NYSE: CPU) is happy to see Compaq -- one of its suppliers -- as a competitor?
For all these reasons, distributors like Tech Data and Ingram -- distributors that do more than fulfill orders and ship boxes -- are an important part of the supply chain. Even Dell uses distributors to fulfill a wide range of products it sells online, and more companies are looking to outsource procurement and shipping operations to companies like Tech Data.
It's a company built to buy in volume and ship quickly, and it's become an efficient player. Its sales, general, and administrative costs -- items including salaries, rent, insurance, and supplies -- represent less than 4% of revenues. Compare it to industry competitor Merisel (Nasdaq: MSEL) whose SG&A costs stand at 5%, or an efficient manufacturer like Apple, whose SG&A costs are at 16%.
Other trends moving in distributors' favor include rapid consolidation and stabilizing computer prices, both of which solidify margins for the surviving players. Struggling computer products distributor CHS Electronics (NYSE: HS) , which is now a penny stock, was forced to sell off big chunks of its operations to pay down debt. It's no longer a player, making Tech Data the dominant distributor in Europe.
Nevertheless, Apple's move to pick up Tech Data doesn't change the fundamentals of the computer products distribution industry, which has razor thin margins and low barriers to entry. That's the rub. One of the reasons its SG&A is so low is because it has to be -- gross margins are 6% and operating margins are about 2%.
Margins don't tell the whole story of a company's business by any means, but it's extremely difficult to feed shareholders with such thin soup. Tech Data earns about a 2% return on its assets, while Apple, which isn't exactly in a high margin business, earns about 12%.
While there's a strong business need for companies like Tech Data in the food chain, and I expect its profitability will increase as the industry consolidates and outsourcing trends accelerate, that doesn't make it a good investment. Tech Data doesn't get to pick what business it's in. Shareholders do. |
