Summary
- Synergies from the merger of Tech Data and TD Synnex are paying off.
- TD Synnex looks attractive based on its valuation, momentum, as well as improving profitability trends.
- Margin expansion and cost controls combine to lead to operating income blowing away expectations.
- A conservative guide for Q1 overshadows an all new repurchase plan that could reduce the float by over 10%.
- There is a sizable long-term upside for TD Synnex, in our opinion.
TD SYNNEX Corporation ( SNX ) was formed as a union of the old Tech Data and Synnex companies. The combined company definitely looks attractive on its valuation , momentum , as well as improving profitability trends. The company is one that we have discussed at our investing service a few times, and a simple view of a one-year chart shows how it is a great name for swing trading.
That said, we believe SNX stock has long-term potential. The company just reported earnings , and we believe that you can consider coming into this stock now, but especially if it retraces under $100. We believe the investments being made to expand more into global information technology, and longer-term into the cloud, will pay off. The union of the two companies, now several quarters since complete, has seen the integration of operations be refined. We believe the company is now firing on most cylinders. The most recent results were strong.
Headline earnings figures impress
Revenue and earnings are growing, and growing impressively. Both the top and bottom line surpassed expectations handily. Just how good? Well, the fourth quarter revenue of $16.2 billion was up 4% from the prior-year period, but if we adjust for currency, it was up 11% from a year ago. This was a $370 million beat versus consensus. What went into these revenues?
Revenue drivers
The strong revenue growth was a result of demand in all three operating regions, with a lot of growth in the "Advanced Solutions" portfolio and high-growth technologies therein. Regionally, there was growth across the board when controlling for currency. Revenues were $10.0 billion in the Americas, rising 8.8% from a year ago. Revenues were $5.4 billion, up 12.6% in Europe, and revenues of $0.8 billion in Asia-Pacific were up a whopping 16.5%.
Operating income widens significantly
So we saw strong SNX revenue growth, but we mentioned a beat on the bottom line. Obviously, higher revenues than expected set the stage for an earnings beat so long as expenses are well-controlled. This was perhaps the most critical piece of this quarter. We saw operating margin expansion in all regions, and this was driven by a shift to high-growth technologies, but more importantly, strong cost discipline and the merger synergies finally shining through. It just takes a few quarters to really get going. Adjusted operating margin was 3.1%, a 50 basis point improvement compared to 2.6% a year ago. That margin improvement, in conjunction with the revenue spike, led to operating income of $496 million versus $408 million last year, a 21.5% improvement.
EPS blows away expectations
With the ballooning operating income, we suspected strength in earnings would follow. The adjusted EPS of $3.44 blew away expectations by $0.52. This was an increase of 20.3% and $0.34 above the high end of the company's prior guidance range. Absolutely stunning result. Things are falling into place for the company, and we suspect the stock continues to move higher. However, the outlook was a touch mixed near term.
Looking ahead
As we look ahead at this company which has a great valuation, strong momentum, and widening profitability, expectations are for ongoing growth. But the company gave conservative guidance in our opinion. We predict the company ramps later in 2023, as H1 2023 could be tough on tech spending. However, that said, revenue is expected to be in the range of $15.2 billion to $16.2 billion for Q1. That is actually slightly below the consensus of $15.9 billion. Adjusted net income is expected to be in the range of $248 million to $287 million, and adjusted EPS was guided in the range of $2.60 to $3.00 vs consensus of $3.05. That was a bit surprising, to see guidance below consensus following a blowout quarter. However, there is an impact of year-over-year foreign exchange headwinds on revenue of approximately $500 million and interest rate movements of $33 million that are weighing.
We also like the shareholder-friendly nature of the company, as in this quarter, in which $29 million in dividends were paid and $42 million of shares were repurchased. The company just announced a brand new $1 billion repurchase program over the next three years. Currently, there are 94.8 million shares outstanding. If the company were to buy all the shares back at $100 per share, it could reduce the float by 10.5%. That is a solid buyback.
As we move forward, we expect SNX organic growth to continue, margins to remain strong, and share count to be reduced. In turn, EPS will grow, and the share price will likely move much higher. For 2023, we anticipate EPS of $12.50-$13.00, which puts SNX stock at a paltry 8X FWD EPS. We think this is a buy.
For further details see:
TD Synnex: This Could Be A Long-Term Big Winner