After a choppy year, shares of Tech Data (Nasdaq: TECD ) , a top information technology distributor, came to life last week -- jumping 16% to $39.50. Despite signs of weakness in the IT sector, the company was able to post a solid fiscal second quarter.
Net sales increased 13.6% to $5.6 billion. There was strength across all key geographies, such as the Americas and Europe. A key success factor has been Tech Data's ability to set the right product mix among suppliers like Apple (Nasdaq: AAPL ) , Cisco (Nasdaq: CSCO ) , Microsoft (Nasdaq: MSFT ) , IBM (NYSE: IBM ) , and so on.
Tech Data has also gotten lots of traction with margins. Over the past year, gross margins improved from 4.56% to 4.89%. This has been the result of a restructuring, which has involved changes in pricing and inventory management, especially in Europe. There was even improvement in sales, general, and administrative expenses, which declined from 4.23% to 4.03% over the past year.
So for Q2, Tech Data posted a net income of $7.2 million, or $0.13 per share, which compares to a net loss of $155.5 million, or $2.81 per share in the same period a year ago. Cash flow from operations was a healthy $198.7 million, which got a boost because of better management of accounts receivables.
With things running smoothly, Tech Data may be poised for some acquisitions. The company has $617 million in the bank and a stronger stock price to get deals done. And in light of the credit crunch, there may be some IT firms feeling the pressure and may want to sell out.
Because of the low gross margins in the distribution sector, there's much leverage on profitability when there are small changes in margins. That appears to be the case with Tech Data and, based on the company's conference call, it looks like the good times will continue. In other words, shareholders may see more nice surprises in the stock price.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 2,509 out of 34,880 in CAPS.
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