2024-01-11 04:41:13 ET
Summary
- TD Synnex reported solid Q4 results amidst tough PC ecosystem comp spend. EPS beat estimates in Q4 handily but fell 5.7% for the year.
- The stock is flat roughly as revenue missed expectations slightly. But buybacks and tech spending should be beneficial in 2024.
- At under 9x 2024 earnings, SNX stock is cheap and should re-rate back to 10-12x (its pre-pandemic range) as comps get easy in the second half of 2024.
- We consider SNX a buy here for those with no position. We peg $90-140 as a range on shares and intend to hold this one for years.
As background, we tend to write up high quality buy and hold stocks, with moats and above average growth. We aim to buy these at below average multiples. We initially wrote up Tech Data here in 2013 and it was up 16.7% annually until it was taken out in June 2020. That compares with the S&P up 11.5% annually in that period.
We further wrote up TECD here plus a few more times with updates, for more background. TECD of course was gobbled up by Apollo in 2020 and then merged with Synnex in late 2021.
We like the newly merged TD Synnex ( SNX ) at current prices and consider the company a solid Compounder. Below is a review of the recently announced quarterly results.
November 2023 Fourth Quarter Results
TD Synnex reported November 2023 fiscal fourth quarter results on Tuesday January 10th.
Big picture, EPS crushed estimates by $0.46 in the November 2023 fiscal fourth quarter but fell 5.7% for the year. PC ecosystem sales obviously popped for a time post-Covid but now are starting to normalize.
Revenue missed by a hair too in the quarter and so the stock initially pulled back a couple dollars. Without much AI excitement surrounding Synnex, mostly tech/momentum investors will ignore this one. But buybacks remain a large tailwind and tech spending will likely continue for ages to come.
Even with the stock trading at now a woeful 8.6x 2024 earnings estimates (15% cheap to its pre-pandemic history), SNX is up 159.3% in the past five years with the S&P up 99.8% (cumulatively).
We continue to expect long term IRRs at least in the 8-10% range (3% revenue growth, plus buybacks of 3-5% and a near 2% dividend yield). The company targets 15-20%. It could be higher with any kind of valuation improvement or with a catalyst (M&A, AI server sales growth). Management has a solid track record here.
Below are quarterly highlights.
Revenue fell 11% YoY, near the midpoint of their guidance range and a 0.5% miss versus estimates. The company has certain customers whereby they now record revenue net of costs of goods sold, which impacted revenue growth by 6%. This is an accounting change and has no impact on gross profits.
Gross billings is the best measure of topline direction. On that basis, gross billings fell 3.9% in the quarter, mostly as PC ecosystem comps are tough post elevated Covid demand. That is expected to improve throughout 2024.
Operating margins remained impressively stable (down 9 basis points) despite higher interest rates and inflation impacting costs.
For the first quarter (February 2024), the company expects gross billings of $19 to $20 billion. That is a 3% decline at the midpoint compared to last year. Total revenue is expected to decline 5% at the midpoint.
Below are year-end figures.
And below is a multi-year slide view . This link has a lot of slides worth reviewing.
Here is Q1 FY 2024 guidance.
For the full 2024 year, the company expects gross billings to be flattish in the first half with mid to high single digits billings growth in the second half.
Based on Q1 guidance and full year commentary, we model $11.89 in EPS this year.
Below is our model.
As for artificial intelligence having an impact here, the company was of course asked and mentioned that they expect AI to be a growing “contributor” to the business. It will be “embedded” in a lot of existing offerings (just as cloud products are). AI servers was mentioned and also that demand will eventually be “robust” in the future.
There frankly was not much to get anyone excited about any AI angle really. But that is not the play here.
Capitalization
The company has an excellent balance sheet at only 1.7x levered on a debt/EBITDA basis.
Valuation
On a free cash flow basis, Synnex generated $1.3 billion last year and guided to $1.2 billion in FY 2024. That is FCF guidance of $13.28 per share based on current shares outstanding basis.
Buybacks will continue however so this should end up higher. $600 million of 2024 FCF is earmarked for shareholders ($140 in dividends and the rest in buybacks). That is a hefty 5% of shares outstanding. Admittedly, the negative technical of Apollo selling shares to the public could offset this. But either way, shares declining will be a large tailwind to EPS growth.
Below is a slide that illustrates why we like this capital light business model.
The other $600 million in free cash flow will be available for tuck in acquisitions or growth capex spend. It is worth reiterating that the moat is huge in this industry. The relationships and IT systems necessary to replicate this business model are large. I want to own stock in a company that Buffett tried to buy (and Apollo owns a big chunk in).
The dividend was increased by 14% in the quarter with SNX now yielding 1.6%.
We see no reason why SNX is not worth at least 10x free cash flow or 10x earnings (roughly its pre-pandemic average).
Below are a handful of scenarios for the stock.
Conclusion
SNX looks attractive here and worth buying with no position. We have been highlighting this name especially in the $90-100 range. It is already going through its earnings recession (last year) and so with easier comps and an improving narrative, Synnex could trade up to $120-140 in a year to three.
We consider this a solid Compounder and so a great name to buy and hold. I would not be shocked to see Buffett buy this company as he bid for Tech Data back in late 2019.
For further details see:
TD Synnex Reports A Large Earnings Beat; Stock Attractive At 8.6x 2024 Earnings Estimates