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How Did it Find Trouble? The "micro" in Ingram Micro may be a good way to describe the company's stock right now. After trading just shy of $55 per share a year ago, the stock is now a fraction of its old highs. The shares had been weak for much of the past year, but earlier this month many of the firm's problems came to a head. On September 8 Ingram announced that it would fall far short of the published Wall Street profit estimates. No trivial profit warning, the company said that its third quarter earnings would be in the $0.10 to $0.14 per share range, well below the $0.41 a share that was expected and the $0.40 reported last year. Not surprisingly, the shares were pummeled after the warning, falling more than 30% the next day and making a new annual low on heavy volume of more than 8 million shares. Along with the earnings warning, Ingram also announced that its CEO since 1996, Jerre Stead, was stepping down. This is rarely a good sign. Stead will remain Ingram's chairman after the new CEO is hired. Where Ingram's shares have rebounded a bit since the punishment it took on September 9, the stock is still well below its annual high. Over the past year, roughly $6 billion worth of Ingram's market value has been erased, giving the company's investors more than their share of Trouble. Business Description Santa Ana, California-based Ingram Micro is the world's largest wholesale distributor of computer products. Peddling more than 225,000 different products, the company sells just about any available computer-related item to nearly 150,000 different resellers around the globe. Ingram Micro in its current form can trace its roots to the old computer distributor Micro D. The monster conglomerate and closely held Ingram Industries, also the nation's largest book distributor, gained control of Micro D and renamed the company Ingram Micro in 1989. Ingram Micro was later spun off from the conglomerate in 1995 and came public in 1996. The Ingram family still has a stranglehold on Ingram Micro. While the family owns just under half of the shares outstanding, it controls nearly 85% of the voting power. Financial Facts
Income Statement How Could You Have Seen it Coming? Ingram's modus operandi has always been to operate on razor-thin margins with monster volume. This strategy can work, but lower-margin activities carry a higher degree of risk and demand operational excellence. With Ingram's net margins perennially around a scant 1%, it should have been obvious that the firm's margin of error, like its financial margins, was thin. Another way to have perhaps avoided Ingram's trouble was to look at some of the major factors at work in the computer market. Namely, the average selling prices of all computer equipment have been in a nosedive for some time now. The sub-$1000 PC craze suddenly became the sub-$500 PC craze, and the lower prices mean a smaller pie to go around on each unit sold. If prices are halved and margins remain flat, that means the company would have to sell double the units to make the same gross profit. Ingram has managed to crank up its volume, but doing so while retaining profitability has been a challenge. An additional factor is that Dell (Nasdaq: DELL) and others in the computer industry have championed "being direct." With Ingram being essentially just a middleman, it has been swimming against the market tide of directly connecting buyers and sellers for some time now. Where to From Here? Middlemen like Ingram aren't going the way of the buggy whip just yet, but the trend is hard to buck while remaining profitable. Investors have to really think about whether distributors like Ingram will be able to thrive in a market that is striving to eliminate as many middle steps as possible in the purchase and distribution process. How this will affect Ingram's success in the years ahead is a fundamental question for investors to ponder. The company said that it expects gross margins in the third quarter to ring in somewhere near 4.8%. No matter how you slice it, that's a mighty thin margin that doesn't look to get fatter any time soon. If the company is going to counterattack its falling margins, it is going to need to really focus on cutting costs and streamlining its operations. Ingram is in the later stages of a restructuring plan that eliminated some overhead costs, but the company will need to be ultra-efficient if it has any hope of a sustained turnaround. On the valuation front, it appears that Ingram is trading on the cheap. With recently watered-down expectations, analysts expect the company to earn $1.38 per share in 2000. That would put the stock price right around 10x forward earnings, which is a significant discount to the market. However, just because the stock is cheap doesn't mean it is undervalued. Long-term investors would do themselves a favor to really think about Ingram's positioning and strategy in the rapidly changing and ever-volatile computer market. This will determine Ingram's success and ultimately the company's stock price heading into the next century. Related Articles:
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