Ingram Micro: A Long Play With Options
Paul Price submits:
Ingram Micro (IM) is a world leader in the wholesale distribution of computer products and related services with almost $30 billion in 2009 revenues. They serve more than 170,000 resellers in over 100 countries in North America, Europe, Asia/Pacific regions and Latin America.
IM recently reported better than expected results for their Q4 [ended Dec. 31, 2009] after also posting year-over-year gains in their third quarter. Estimates have been ramping upwards. Consensus estimatesnow see 2010 – 2011 EPS at $1.70 and $1.94 respectively.
This is especially good news as earnings from continuing operations had remained flat at $1.56 from 2006 through 2008 before declining in the first half of 2009. Here are the per share numbers for IM (excluding one-time items) as reported by Value Line:
|
Year
|
Sales
|
C/F
|
EPS
|
B/V
|
Avg. P/E
|
|
2001
|
169.01
|
1.10
|
0.32
|
12.53
|
44.3x
|
|
2002
|
148.96
|
1.15
|
0.49
|
10.85
|
29.2x
|
|
2003
|
148.81
|
1.33
|
0.81
|
12.33
|
15.4x
|
|
2004
|
160.40
|
1.38
|
1.01
|
14.12
|
16.2x
|
|
2005
|
177.43
|
1.91
|
1.50
|
15.02
|
11.6x
|
|
2006
|
185.10
|
1.93
|
1.56
|
17.24
|
12.2x
|
|
2007
|
202.65
|
1.97
|
1.56
|
19.82
|
12.8x
|
|
2008
|
212.99
|
2.07
|
1.56
|
16.46
|
10.2x
|
|
2009
|
175.94
|
1.73
|
1.34
|
17.95
|
11.6x
|
The 2005 – 2008 plateau in earnings contributed to the contraction in IM’s multiple from > 15x to about 11.6x – 12.8x over most of the period since 2005. I believe the renewed growth will lead to an expansion of their P/E looking forward.
Based on the consensus views for 2010 and 2011 Ingram now sells for only 10.6x this year’s and < 9.3x next year’s expectations. A rebound to even 13 times the 2010 estimate brings me to a 12-month target price of $22.10 or 23.1% above this afternoon’s quote.
Is that a crazy goal? No. IM shares actually changed hands at peak prices of $21.00 – $22.50 during each calendar year 2004 through 2007 – years when EPS ranged from $1.01 to $1.56 versus the $1.70 estimate for this year. Ingram shares traded north of $54 in 1998 at the height of the tech/internet bubble.
Zacks just put Ingram Micro on its Aggressive Growth buy list. Standard and Poors gives IM a 4-Star rating (out of 5) and carries a 12-month target of $21. Morningstar sees ‘fair value’ as $23 share after processing the good December quarter results into their figures.
Summary:
Ingram’s nice earning surprise and low valuation make for a favorable risk/reward for buyers of IM shares. I see a 20% – 25% one-year move even if the P/E remains well below previous levels achieved when earnings were growing.
There doesn’t appear to be a lot of risk as the absolute low share prices in 2006 and 2007 were $16.50 and $17.80 when earnings were well below what are now projected for 2010.
Option savvy investors might consider this 6.6 month buy/write combination:
|
|
Cash Outlay
|
Cash Inflow
|
|
Buy 1000 IM @ $17.95 /share
|
$17,950
|
|
|
Sell 10 IM Sep. $20 calls @ $0.75 /share
|
|
$750
|
|
Sell 10 IM Sep $17.50 puts @ $1.25 /share
|
|
$1,250
|
|
Net Cash Out-of-Pocket
|
$15,950
|
|
If Ingram Micro rises to at least $20 (+ 11.5%) by Sep. 17, 2010:
· The $20 calls will be exercised.
· You will sell your shares for $20,000.
· The $17.50 puts will expire worthless.
· You will be left with no shares and $20,000 in cash.
· You will have no further option obligations.
This best-case scenario profit would be $20,000 – $15,950 = $4,050/$15,950 = 25.3% achieved in just about 6.6 months on shares which only needed to rise by 11.5%.
If Ingram Micro shares finish unchanged at $17.95 on the Sep. 17, 2010 expiration date:
· The $20 calls will expire worthless.
· The $17.50 puts will expire worthless.
· You will hold 1000 IM shares worth $17,950.
· You will have no further options obligations.
You could liquidate for a net gain of $17,950 – $15,950 = $2,000/$15,950 = 12.5% achieved in about 6.6 months on shares that did not go up.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $17.95 purchase price less the $0.75 /share call premium = $17.20 /share.On the ‘put’ shares (if IM ends up < $17.50) it’s the $17.50 strike price less the $1.25 /share put premium = $16.25 /share.
Your overall break-even would be $16.73 /share. IM could fall by up to $1.22 /share (-6.8%) without causing a loss on this trade.
Summary:
On the buy/write combination your best-case gain would be +25.3% if IM rises to $20 or higher. You would make 12.5% over the 6.6 months if the shares do absolutely nothing. You are protected against a loss unless IM drops to below $16.73/share.
Disclosure: Author is long IM shares and short IM options.
Investing, Long Term Investment, stock market | admin February 23, 2010
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