1/16/2018
Tech Data Corp NASDAQ: TECD
TECD is a wholesale distributor of electronics, computers, and computer stuff. Not great returns on equity but pretty nice earnings growth. They sell directly to resellers and various other manufacturers: Apple, Cisco, Hewlett Packard Enterprise, Hewlett-Packard Inc., IBM, Lenovo, Microsoft, Sony, Symantec and VMware.
Price at write-up $104.85
Indexes (30, 180 day looks)
VIX: 11.66 (+23.78%, 22.61%)
TED: 27.8
S&P500: 27886.24 (2448, 2663)
Target: 117
Valuation Ratios
Price/Earnings (TTM) . . . . . 19.96x
Price/Sales (TTM) . . . . . . . 0.12x
Earnings per share . . . . . . . . 5.24
Price/Book (MRQ) . . . . . . . . 1.47
Price/Cash Flow (TTM) . . . . 12.46
Held by institutions . . . . . . . 97.4%
Short interest . . . . . . . . . . . . 2.7%
Dividend . . . . . . . . . . . . . . . . none
MarketCap 4.0B
This stock isn't particularly sexy and I don't see how it can be a long-term buy. Short-Term, perhaps. Intermediate term is doubtful. They have a great track record of growth and have been acquiring businesses which would have been great news if you bought them 10 years ago. They're a big middle man reselling other manufactures products, creating products of other people's products. To me assembly and aggregation is the business area where companies price themselves out of existence while they eke out marginal existence until the underlying market inefficiency is removed. Alienware and Dell might be a good case study here.
This happens on two measures.
First costs actually go up the larger you get. Remember this is not vertical integration, TECD doesn't actually create or produce anything - even packaging - so it can't gain the efficiency of say using only one warehouse for pre-&post assembly storage nor line efficiency creating all the components as well as the final product in one go. A larger number of products means the buisness is more incrementally susceptible to the second measure as time goes on.
If you've ever bought alcohol products (or a car) in America you've participated in the three tier (two tier) distribution system: producers, distributors, and retailers. Meaning that, unless you have a special exemption, producers can't sell products directly to a consumer - products must pass through a middle man first. That is a manufacturer or importer can only sell to a distributor, if you are a distributor you can only sell to retailers. If you're a retailer you can sell to anyone you want to but the product has already been marked up 10-40% 3 times. Why don't producers sell directly to consumers or retailers? It's illegal. Grossly that is the barrier. Would the producers rather sell directly to retailers? Usually. Would you, the consumer, rather buy the same product at 40% off? Obviously. Car dealerships work in a similarly protected two tier system. Cheaper products would be in the consumers hands with less lag time (faster product to market). Amazon is a distributor that is also a retailer for example. So the second major problem is that TECD buys from be producers, performs some sort of task then sells to, Tech Companies, who in turn sell to retailers. And this chain isn't protected by an archaic law. Meaning that at any point the Tech Companies can just edit TECD out of the cycle. Will they? Won't they?
All this means that TECD can only be operating because of inherent distribution system problems, market inefficiency, market inequity, human resource disparity, complexity of automation, all of which will likely be eliminated as China industrializes. The American industrial revolution lasted 60 years (1760-1820), China's will far exceed ours in scale but not in time. Their low level experiments with capitalism began in 1978 and pledged to allow market forces a role in the economy in 2013. So by my math by 2028 China should be able to out manufacture and assemble the US. China will be getting better faster than the US at what point will they surpass us? TECD is admittedly beating them now and created a substantial place for themselves since the late 1990s.
How long can they keep this up? 2 more years? 5? Likely not 10. In these cases how do you know TECD will not be disrupted in the next 90 days? If apple switches to a different component assembler or opts to directly work with the actual manufacturer (as they are certainly likely to do eventually) TECD will be cut out of their own business. So you could buy before that drop and sell into it. Not the sort of investment I'm interested in without significantly more meat on the bone.
There is a reason Amazon isn't both a manufacturer, distributor, and retailer, at a certain point a company gets too big and cannot be effectively managed by humans. It's enough to master two points of the system. If TECD can replace Apple, Google, Cisco, Dell, Sony, or Microsoft it has a chance - but what are the chances of that?
High percentage holdings by institutions, meaning market makers and investing funds have already found this company and hold most of it. It's 107 on fortune 500 list, this company has made it and everybody knows it.
Increasing cash flow is always a good sign, a trend that will likely continue for another year I suspect.
Insiders have been selling between 100 & 110 over 2017 which in my mind brings into question how much one can expect to gain if one were to purchase it at 104. On the plus side another nice pull back is on the horizon given past performance. I speculate one could likely purchase shares between 85 and 95 keeping a eye out for a sale opportunity within 2 years.
Trailing average price 98.43
Conclusion
TECD has done well to this point, but it seems they are a secondary company in a commodity driven market with no discernible IP. Their place in the distribution system is out moated and due for irrelevance. It's difficult to predict when this will occur, I'd expect it to occur within the next five years and be surprised if it didn't happen within 10 - but it could start to decline in 6 to 8 months. If I were to buy this I'd price it at $93 or under and I'd hold it less than 2-5 years, but it's a soft pass for me. My money would be better spent investing in the IP behind the products they are the middle men of middle men for, though not in the manufacture of the component products themselves.
Due Diligence - CDW, OLED, NVDA, KRX: 005930 (Samsung), PLUS, NSIT, SNX.
Tech Data Corp NASDAQ: TECD
TECD is a wholesale distributor of electronics, computers, and computer stuff. Not great returns on equity but pretty nice earnings growth. They sell directly to resellers and various other manufacturers: Apple, Cisco, Hewlett Packard Enterprise, Hewlett-Packard Inc., IBM, Lenovo, Microsoft, Sony, Symantec and VMware.
Price at write-up $104.85
Indexes (30, 180 day looks)
VIX: 11.66 (+23.78%, 22.61%)
TED: 27.8
S&P500: 27886.24 (2448, 2663)
Target: 117
Valuation Ratios
Price/Earnings (TTM) . . . . . 19.96x
Price/Sales (TTM) . . . . . . . 0.12x
Earnings per share . . . . . . . . 5.24
Price/Book (MRQ) . . . . . . . . 1.47
Price/Cash Flow (TTM) . . . . 12.46
Held by institutions . . . . . . . 97.4%
Short interest . . . . . . . . . . . . 2.7%
Dividend . . . . . . . . . . . . . . . . none
MarketCap 4.0B
This stock isn't particularly sexy and I don't see how it can be a long-term buy. Short-Term, perhaps. Intermediate term is doubtful. They have a great track record of growth and have been acquiring businesses which would have been great news if you bought them 10 years ago. They're a big middle man reselling other manufactures products, creating products of other people's products. To me assembly and aggregation is the business area where companies price themselves out of existence while they eke out marginal existence until the underlying market inefficiency is removed. Alienware and Dell might be a good case study here.
This happens on two measures.
First costs actually go up the larger you get. Remember this is not vertical integration, TECD doesn't actually create or produce anything - even packaging - so it can't gain the efficiency of say using only one warehouse for pre-&post assembly storage nor line efficiency creating all the components as well as the final product in one go. A larger number of products means the buisness is more incrementally susceptible to the second measure as time goes on.
If you've ever bought alcohol products (or a car) in America you've participated in the three tier (two tier) distribution system: producers, distributors, and retailers. Meaning that, unless you have a special exemption, producers can't sell products directly to a consumer - products must pass through a middle man first. That is a manufacturer or importer can only sell to a distributor, if you are a distributor you can only sell to retailers. If you're a retailer you can sell to anyone you want to but the product has already been marked up 10-40% 3 times. Why don't producers sell directly to consumers or retailers? It's illegal. Grossly that is the barrier. Would the producers rather sell directly to retailers? Usually. Would you, the consumer, rather buy the same product at 40% off? Obviously. Car dealerships work in a similarly protected two tier system. Cheaper products would be in the consumers hands with less lag time (faster product to market). Amazon is a distributor that is also a retailer for example. So the second major problem is that TECD buys from be producers, performs some sort of task then sells to, Tech Companies, who in turn sell to retailers. And this chain isn't protected by an archaic law. Meaning that at any point the Tech Companies can just edit TECD out of the cycle. Will they? Won't they?
All this means that TECD can only be operating because of inherent distribution system problems, market inefficiency, market inequity, human resource disparity, complexity of automation, all of which will likely be eliminated as China industrializes. The American industrial revolution lasted 60 years (1760-1820), China's will far exceed ours in scale but not in time. Their low level experiments with capitalism began in 1978 and pledged to allow market forces a role in the economy in 2013. So by my math by 2028 China should be able to out manufacture and assemble the US. China will be getting better faster than the US at what point will they surpass us? TECD is admittedly beating them now and created a substantial place for themselves since the late 1990s.
How long can they keep this up? 2 more years? 5? Likely not 10. In these cases how do you know TECD will not be disrupted in the next 90 days? If apple switches to a different component assembler or opts to directly work with the actual manufacturer (as they are certainly likely to do eventually) TECD will be cut out of their own business. So you could buy before that drop and sell into it. Not the sort of investment I'm interested in without significantly more meat on the bone.
There is a reason Amazon isn't both a manufacturer, distributor, and retailer, at a certain point a company gets too big and cannot be effectively managed by humans. It's enough to master two points of the system. If TECD can replace Apple, Google, Cisco, Dell, Sony, or Microsoft it has a chance - but what are the chances of that?
High percentage holdings by institutions, meaning market makers and investing funds have already found this company and hold most of it. It's 107 on fortune 500 list, this company has made it and everybody knows it.
Increasing cash flow is always a good sign, a trend that will likely continue for another year I suspect.
Insiders have been selling between 100 & 110 over 2017 which in my mind brings into question how much one can expect to gain if one were to purchase it at 104. On the plus side another nice pull back is on the horizon given past performance. I speculate one could likely purchase shares between 85 and 95 keeping a eye out for a sale opportunity within 2 years.
Trailing average price 98.43
Conclusion
TECD has done well to this point, but it seems they are a secondary company in a commodity driven market with no discernible IP. Their place in the distribution system is out moated and due for irrelevance. It's difficult to predict when this will occur, I'd expect it to occur within the next five years and be surprised if it didn't happen within 10 - but it could start to decline in 6 to 8 months. If I were to buy this I'd price it at $93 or under and I'd hold it less than 2-5 years, but it's a soft pass for me. My money would be better spent investing in the IP behind the products they are the middle men of middle men for, though not in the manufacture of the component products themselves.
Due Diligence - CDW, OLED, NVDA, KRX: 005930 (Samsung), PLUS, NSIT, SNX.