Ingram Micro Returns to Net/Net Land

 | Oct 24, 2011 | 10:33 AM EDT
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For a while, it appeared as though IT products distributor Ingram Micro (IM) was shaking the dust off of its feet and leaving net/net land -- the cohort of stocks that trade below net current asset value -- perhaps for good. Not so fast, though: After running up more than 21% between Oct. 3 and Oct. 14, shares pulled back more than 7% this past Tuesday after a company issued a warning that third-quarter earnings would be in the range of $0.32 to $0.34 a share, below the $0.41 consensus forecast. The company blamed weakening demand in Europe and difficulties with its Australian business.

As a result, Ingram once again trades below its net current asset value, or NCAV (current assets minus total liabilities). The company has been here before, but it is not your typical net/net. First, with a market cap of more than $2.8 billion, it is much larger than what you typically find trading below NCAV. In fact, Ingram's market cap exceeds that of the next 11 net/nets combined. Although we occasionally see companies of Ingram's size meeting the net/net criteria, this typically happens after severe market pullbacks, such as what we experienced in 2008-2009, and not in this type of market environment.

Second, Ingram is a profitable company, while the typical net/net is either losing money or is just marginally in the black. Ingram trades at less than 10x trailing earnings and 9x 2012 consensus estimates. A typical net/net company has faced some real challenges and is seen as having already had its best days. Or there may be some life left, but the markets are no longer paying any attention, primarily because of the company's relatively small size. Ingram does not seem to fit either profile.

Granted, the company's net margin is thin at 0.8% on a trailing 12-month basis. But this is still a business that generated $35.8 billion in revenue in the trailing 12 months, earned $296 million, or $1.85 per share, and generated $1.62 per share in free cash flow. I wish there were more net/nets like this. This is not your typical net/net dumpster dive.

The balance sheet is also quite strong. Ingram ended the second quarter with $1.37 billion, or $8.58 per share, in cash. After backing out total debt of $643 million, net cash per share is still a healthy $4.54. With total current assets of about $8.4 billion and total liabilities of $5.5 billion, Ingram has net current assets of about $2.9 billion, slightly in excess of its current $2.86 billion market cap. The company is currently trading at just 0.85x tangible book value per share of $20.94.

While you should never expect instant gratification when shopping for net/nets, I wish there were more like Ingram. 

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