What happened

Shares of IT products distributor Tech Data Corp. (NASDAQ:TECD) are down more than 21% at 1:45 p.m. EDT on Sept. 1, following the release of the company's second-quarter financial results after market close on Aug. 31. In short, two things are behind the big sell-off in Tech Data's stock today. 

  • Adjusted earnings of $1.74 per share came in below analyst estimates for $2.06.
  • Company guidance for adjusted third-quarter earnings of $1.84-$2.04 per share landed below analyst estimates for $2.20 per share.

And as is often the case when a company's results fail to meet Wall Street analyst estimates, its stock gets beaten up. 

A man lighting a $100 bill on fire.

Tech Data investors may feel this way today. Image source: Getty Images.

So what

A little closer look at Tech Data's results -- on a GAAP basis -- shows where things broke down. Second-quarter revenue of $8.9 billion was up 40% but was almost entirely because of last year's acquisition of Technology Solutions. This increased operating earnings by 41% and operating margin 2 basis points to 1.17%, but only resulted in a 2% increase in net income due to higher expenses. Earnings per share declined 5% to $1.24, due to an increased number of shares outstanding following the Technology Solutions acquisition. 

When adjusting for acquisition-related factors, foreign exchange, and other non-recurring items, the results were a little better. Operating income was up 64%, operating margin was up 21 basis points to 1.44%, net income was up 33%, and earnings per share increased 23% to $1.74 per share. 

Investors should be cautious with too liberal a use of adjusted, non-GAAP financial reports, and they should never be used as a substitute for GAAP reporting. After all, adjusting for certain items, or ignoring non-recurring expenses, when a company has a history of regularly reporting non-recurring expenses, can lead you astray from a company that could be in serious trouble. 

But adjusted results can be handy when used in tandem with GAAP, particularly in the case of a company like Tech Data right now, which is still working to integrate Technology Solutions into its core business. The key is that, over time, the adjusted results and the GAAP results should start to look more alike, as the non-recurring expenses related to the Technology Solutions acquisition come to an end and the company starts delivering on the expected increased profits and cash flows that were the basis of the acquisition. 

Now what

Here's where things get tricky: If Tech Data can deliver on its promise with Technology Solutions, the stock is pretty cheap, trading for around 11 times adjusted earnings expectations. That could be a very cheap price even if the company doesn't deliver on all the promise of the acquisition. On a GAAP basis, Tech Data shares trade for 16 times trailing earnings, a reasonable price but not necessarily a bargain. 

That's particularly true if the Technology Solutions acquisition doesn't work out, and actually leads to higher expenses that end up driving cash flows and per-share profits down. So before you back up the truck, consider whether you'd rather wait for things to pan out before fully committing. A better approach may be to open a small stake today and keep an eye on the results over the next couple of quarters to see how things are working out before deciding whether to invest more.