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Wednesday, August 02, 2006

Tech Data Woes Appear Company Specific

After reviewing Tech Data's warning and comparing it to the rest of the lot, this looks more company specific and superficial than representative of more worrying above what is already being priced in for technology investors.

Stock Tickers: TECD, IM, JBL, CLS, FLEX, SANM, SLR

Shares of Tech Data (TECD) are down 3.7% at $35.40 after the company said a lower than expected overseas volume would create an earnings and revenue miss. Shares were down about 8% pre-market and this appears to be somewhat localized, or that is the verdict the street delivered today.

TECD now forecasts near break-even on revenue of $4.94 billion. Tech Data's previous forecast called for net income of $17 million to $20 million, or 30 cents to 36 cents per share, and revenue of $4.95 billion to $5.10 billion. The revenue isn’t the big issue here, but this earnings issue is just atrocious. A higher than expected tax rate related to the sales drop is expected to account for one-third of the anticipated earnings shortfall, although that is a pretty lousy tax strategy. The rest of the drop is blamed on ongoing restructuring efforts in EMEA operations (Europe, Middle East, and Africa).

About the only good news is that Tech Data may not resemble a total meltdown in technology spending and demand worldwide, or at least not any worse than what an efficient market has been pricing in. Part of this is a chicken and egg discussion as one-third of the drop is a direct impact to lower sales.

DISTRIBUTION COMPETITOR

The direct competitor to TECD as far as the stock traders are concerned is Ingram Micro (IM), and IM already reported earnings last week. The company did cite Europe as “challenging” but they did not issue the same negative guidance. The quotes from IM’s guidance even note “guidance reflects year-over-year sales growth of 5 to 8 percent. Sequentially, we expect sales to be relatively flat, in line with seasonal norms.”

So after reviewing all the available data, this may be a company specific issue. IM holders probably do not appreciate the 1.25% drop to $17.20 on IM stock this morning, but it had been as low as $17.06.

OUTSOURCED MANUFACTURING COMPANIES

Most of the EMS stocks (outsourced electronic manufacturing services) companies have also reported earnings by now. The distribution companies get many shipments from these EMS companies and then turn around and distribute both parts and finished products to all points up and down the supply chain.

Jabil (JBL) already took their huge hit last month seeing shares drop from $35 to $25 overnight and then drifting lower to a current $22.96.

Celestica (CLS) also posted a net loss last week, buts its guidance wasn’t representative of any worse than expected tech meltdown. CLS stock is actually trading higher than its earnings date.

Flextronics (FLEX) also posted higher income last week, and FLEX shares are trading higher.

Sanmina (SANM) is hard to throw in the same boat as they are not as influential and relevant as other EMS companies. Its shares are down as sales dropped and it had to delay its formal earnings because of options probes.

Solectron (SLR) reported its earnings at the end of June and its shares are down about 10% or so since then, so lumping them in for a conclusion may be difficult.

CONCLUSION

Based on the fact that most of the EMS stocks have their data out and the data is fresh, this looks very company specific. Everyone knows there is a tech slowdown occurring right now and that hasn’t changed, but the “good” news in this bad news is that it doesn’t directly imply a sudden worsening of the situation beyond what is already known.

Jon C. Ogg
August 2, 2006
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