This is good collateral news. It also
answers some of the points raised by Don Young.
___________________________________
IM: Raising Estimates and Price Target;
Reiterate Buy
08:45am EDT 24-May-99 Salomon Smith Barney (Gardner)
SUMMARY:
*Ingram Micro held a well attended analysts'
meeting in New York last
Friday. Management used the meeting to educate
investors about their
misunderstood industry and to dispel several myths
about distribution. We would characterize the tone
of the meeting as extremely positive.
*Management provided a surprising level of
detail regarding the revenue opportunity
presented by Compaq's Distributor Alliance
Program. This detail leads us to raise our
F2000 revenue estimate from $34.1 billion to
$35.3 billion, and our F2000 earnings estimate
from $2.08 to $2.15.
*We are also raising our price target from
$35 to $40 and reiterate our Buy (1H) rating.
*We also remind investors that the Compaq DAP
program is not an isolated incident, but rather
the first of many such announcements.
EARNINGS PER SHARE
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $0.38A $0.37A $0.40A $0.49A $1.64A
Current 12/99 EPS $0.29A $0.33E $0.45E $0.60E $1.67E
Previous 12/00 EPS $0.47E $0.48E $0.51E $0.62E $2.08E
Current 12/00 EPS $0.49E $0.50E $0.53E $0.63E $2.15E
OPINION
DISPELLING MISCONCEPTIONS ABOUT WHOLESALE
DISTRIBUTORS
Ingram Micro management used Friday's meeting to
dispel several misconceptions regarding
wholesale IT distribution.
1) The first misconception is that all information
technology vendors will go direct, like Dell.
Ingram CEO Jerre Stead pointed out that, in
reality, most IT vendors are increasing their
usage of distributors. Why?
Because most vendors do not have the telesales,
configuration, fulfillment or returns infrastructure
in place to support direct sales to the many
thousands of local/regional resellers that serve
the small to mid-sized business market. If vendors
like Compaq, HWP, IBM or Cisco wanted to go direct,
they would each have to develop these capabilities
internally. By collectively outsourcing these functions
to a single (or a few) wholesale distributors, many
vendors are able to leverage the same infrastructure,
reducing overall costs.
2) The second misconception is that wholesale distributors
are not involved in vendors' "direct" initiatives. <v>Stead
pointed out that Compaq has outsourced the telesales,
product configuration and fulfillment of its Prosignia
line (which is sold "direct" via the Internet and the
telephone) to Ingram Micro and Tech Data. Moreover,
Microsoft has outsourced the channel inventory management
and fulfillment of its entire retail product line to
Ingram Micro in the U.S., even as MSFT manages more of
these sales with an internal sales force. Finally,Compaq
and IBM will use Ingram Micro to perform final product
configuration and fulfillment of products that they
sell "directly" to their large accounts customers.
Net, net, wholesale distributors like Ingram will play
some role in many of the initiatives that appear
"direct" to the end-user.
3) The third misconception is that Internet commerce
will kill the wholesale distributor. As Stead
pointed out, Internet resellers like Buy.com do not
have, nor do they want, any of the warehousing or
fulfillment capabilities necessary to fulfill the
thousands of products they sell-they depend
exclusively on wholesale distributors like Ingram
Micro for the fulfillment of almost 100% of their
products. We believe Internet sales represent a
partially incremental opportunity for Ingram because
a portion of the products sold by Buy.com and other
Internet resellers would have been procured directly
from vendors by retailers instead of flowing through
distribution.
4) The final misconception dispelled by Stead was
that two tier distribution (OEM to distributor to
reseller to end-user) creates multiple product mark-ups,
resulting in higher costs. In reality, the services
provided by wholesale distributors (telesales,
configuration,fulfillment, returns management,
financing) are necessary elements of the product
sales and fulfillment process. Moreover, Ingram Micro
performs these all of these services for just 5 to
6 points of gross margin versus 7-10 points for
corporate resellers.
ELIMINATING MULTIPLE INVESTMENTS
Doug Antone, EVP of Ingram's Frameworks Program,
talked of the duplicate investments that have and
continue to be made in IT sales and fulfillment.
According to Antone, there are many functions that
are currently performed by both vendors and
distributors, including telesales/order processing,
manufacturing, warehousing, final assembly, returns
management, credit/lease management, repair,
technical support, e-commerce and export management.
The same duplication of effort often exists between
distributors and resellers. By eliminating overlapping
operations, vendors, distributors and resellers can
significantly reduce the total cost of producing and
bringing fully configured solutions to end-users.
Vendors already depend on distributors like Ingram
to provide almost all of the services mentioned above
for their small to mid-sized business resellers.
Over the next 12-18 months, we believe vendors will
select a few key distributors to provide these services
for resellers of all types and sizes. Compaq's Distributor
Alliance Program is an example of this trend. Compaq is
forcing resellers of all sizes to leverage the
infrastructure of a few large distributors
(of which Ingram is one).
MORE DETAIL ON COMPAQ'S DAP PROGRAM
Antone provided significantly more detail regarding
the DAP revenue opportunity than Ingram had previously
provided. According to Antone, the incremental revenue
placed in play by the DAP program is approximately
$6.7 billion. Ingram represents approximately 60% of
the revenue of the four distributors included in the
DAP program-if Ingram were to capture 60% of the
incremental $6.7 billion, this would amount to $4 billion
annually. We had previously estimated $1.7 billion.
We are raising our F2000 revenue and earnings estimates
for Ingram to reflect an increase in DAP revenue.
While we have not given Ingram credit for the full
$4 billion, we do believe that Ingram should be able to
capture $2.8 billion during F2000 versus our prior
estimate of $1.7 billion. Our F2000 revenue estimate
goes from $34.1 billion to $35.3 billion.
Our F2000 earnings estimate goes from $2.08 to $2.15.
RAISING PRICE TARGET TO $40
We are also raising our price target on Ingram
Micro shares from $35 to $40. The shares are currently
trading at 17X forward twelve month
earnings. Assuming no multiple expansion, our new
F2000 earnings estimate implies a 12 month price
target of $40, or 29% upside from the current
share price.
WE BELIEVE OUR REVISED ESTIMATES ARE CONSERVATIVE
We believe that there is upside to our current
estimates for the following reasons:
1) Our estimates do not include revenue from similar
programs by other major IT vendors;
2) our estimates do not include revenue from other
outsourcing deals with large resellers like the one
announced by Tech Data and GE last week.
Ingram will capture its fair share of such revenue;
3) our estimates for the amount of DAP revenue
accruing to Ingram Micro could prove conservative;
4) our estimates make no attempt to capture fee-based
revenue for performing certain functions
final configuration, channel assembly, fulfillment)
as part of vendors' "direct" initiatives.
The major risk to our thesis on Ingram Micro shares
is a slow-down in demand for IT products due to Year
2000 or some other disruptive event. Ingram management
does concede that it has not factored a positive or a
negative impact from Y2K into its internal expectations
because the exact nature of the impact is impossible to
predict. Moreover, Ingram continues to cite "less than
robust" demand in Europe, especially in the UK,
Italy and Germany. We believe that announcements
like Compaq's DAP will offset these negatives and
still provide some upside to earnings.
We reiterate that Compaq's DAP announcement is but
one in what will be a stream of similar outsourcing
announcements by both vendors and resellers. Ingram Micro
is uniquely positioned to capture this incremental business
due to its 1) global reach, 2) strong management,
3)strong balance sheet, and 4) bullet-proof logistics
and IT systems capability.
We expect further revisions in our earnings
estimates during the coming 12-18 months as such agreements
come to light.
We reiterate our Buy rating on Ingram Micro shares with
a new price target of $40. |
