Ingram Micro Sees More IT Spending Across All Regions

We are maintaining our fair value estimate and economic moat rating for Ingram Micro IM after the company reported solid first-quarter results that indicated consumers across the globe are spending more on IT. Ingram Micro’s sales grew 19% year-over-year to $10.6 billion, with the 2012 BrightPoints and Aptec acquisitions adding $1.85 billion, or 13%, to the top-line. Organic sales added 6% growth. Encouragingly, the company generated organic growth across all regions, with particularly strong demand in India and Australia.

We think Ingram Micro’s results provide an interesting contrast to Avnet AVT –an enterprise IT distributor–which, earlier in the day, reported weak demand in Western markets during the March quarter. Ingram Micro’s exposure to consumer products (for example, HP and Apple products made up 26% of first-quarter sales) suggests that while consumers are continuing to spend on key items, such as mobile devices, businesses are buying less from distributors. We expect businesses to take advantage of higher IT spending by consumers with policies like “bringyour- own-device,” which transfer the device costs to the employee, which could benefit Ingram Micro at the expense of enterprise distributors like Avnet.

Ingram Micro’s gross margins popped 30 basis points relative to the year-ago quarter, bolstered by the added sales from its 2012 acquisitions. Meanwhile, its operating margins declined 30 basis points, as the company expanded its life cycle business footprint. We like that Ingram Micro is leveraging its global infrastructure and expanding its acquired, scalable businesses into new regions. These expansions will likely offer attractive returns and improve the company’s profitability.

Looking ahead to the second quarter, management expects sales to grow 1%-4% sequentially, with relatively flat gross margins. We’re optimistic that Ingram Micro can benefit from emerging markets’ growing appetite for consumer electronics, as well as the expanding lifecycle business. However, we caution that distribution is a cyclical industry that can go through unexpected swings, and we would like to see a larger margin of safety before recommending Ingram Micro’s shares to investors.

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