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The market's rally since the beginning of September has been broad-based and extremely profitable for investors. Many have pointed to quantitative easing and the subsequent dollar devaluation as a rationale for the gains, but there seems to be more at play. While the S&P 500 has tacked on more than 12% since the beginning of the rally, the Nasdaq Composite has been even more impressive, gaining 18%.
The technology barometer has shown remarkable strength even in the face of tech bellwether Cisco's (Nasdaq: CSCO ) quarterly blow-up less than two weeks ago. Recent reports from Cisco competitors such as F5 Networks (Nasdaq: FFIV ) and Juniper (NYSE: JNPR ) tempered investor fears, as their reports last month did not have similar problems to those of the old-tech giant. But these small-tech infrastructure providers can't explain the overall strength in the sector.
With many investors still wondering whether the tech rally is for real, I would point them to Monday's earnings release and conference call from under-the-radar technology distributor Tech Data (Nasdaq: TECD ) .
Distributing the goods
Tech Data doesn't make products for consumers and businesses; it just makes sure that manufacturers' products get to the end users or customers in a timely fashion. A diverse range of technology companies, including IBM, Oracle, and Microsoft, all depend on Tech Data to distribute its products to one of 125,000 resellers in more than 100 countries. Many of the world's largest corporations have technology departments, but Tech Data sells about $88 million in technology service products daily to mostly small and midsize businesses.
I'm not sure why Tech Data and fellow technology distributors Ingram-Micro (NYSE: IM ) and ScanSource (Nasdaq: SCSC ) fly under the radar; however, I don't believe they should. These companies provide a real tell on technology spending, and if Tech Data's report on Monday was any indication, sales are booming and the company is expecting the trend to continue into 2011.
"Our U.S. operations exceeded our expectations, with the combination of solid top-line growth and good expense management delivering strong leverage and excellent operating margin performance," Tech Data CEO Robert Dutkowsky said on the company’s conference call. "We continue to see strength in the U.S. SMB [small and medium-sized business] space, our core customer set, with double-digit growth across most product categories again this quarter."
Strength across the board
Dutkowsky was extremely bullish on the conference call, telling analysts that this top-line growth was coming from many areas of the U.S. technology sector. On the consumer side, he specifically mentioned the strength in big-screen televisions, LEDs, LCD infrastructure, and digital displays. He also mentioned strong sales in the networking, servers, virtualization software, and storage segments.
In addition, despite the woes plaguing Europe, Tech Data also reported that businesses and consumers are spending much more than the company had anticipated. The top product lines in Europe during the quarter were desktops, phones, mobility, servers, and tablets.
In short, Dutkowsky pretty much ran down the list of important tech components and mentioned how strong sales have been in each.
It's notable that he said tablets are now among Tech Data's fastest-growing product lines in both Europe and the United States. Most consumers are probably familiar with Apple's (Nasdaq: AAPL ) iPad, and he mentioned that many of the company's suppliers have similar products in development or that are already on Tech Data's shelves. The company believes this segment is making real headway and will be an important growth engine for some of its technology vendors over the coming years.
Ingram-Micro also reported that the tablet platform is being used not only by consumers but by businesses as well. CEO Greg Spierkel said tablets are seeing significant demand from businesses, with a bevy of sales representatives who do most of their work outside the office. As Tech Data and Ingram-Micro both distribute tablets from Apple and competitors, these technology distributors can provide valuable insight into a rapidly growing market.
I encourage investors to keep a close eye on these companies that play a central role in the technology sector. Although a positive earnings report and conference call from one company certainly does not make a trend, Tech Data's report does provide clues as to what segments are performing or underperforming. If the clues the company reported last quarter are any indication, things are looking good for tech investors.
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