We at The Motley Fool have tried to get across many different messages to individual investors over the years -- you can beat the market by yourself, Wall Street is not your friend, and so on. Another of those important messages is that P/Es and PEG ratios don't always tell the whole story: Sometimes stocks look "cheap" for a very good reason and aren't in fact cheap at all.
So it was with this in mind that I tackled SYNNEX's (NYSE:SNX) fourth-quarter earnings. If you haven't heard of SYNNEX, don't feel too bad. It's the third-largest wholesaler of IT products in the country, but quite a bit smaller than rivals Ingram Micro (NYSE:IM) and Tech Data (NASDAQ:TECD).
Sales for the quarter were up 11%, with revenue in the IT distribution business up 15% and revenue in the small contract assembly business basically flat. Margins were a bit softer this period, though, and the company's operating income grew at just a 6% clip compared with last year. While reported income from continuing operations was down 17%, the discrepancy comes from financing expenses and a higher tax rate.
This is something of a good news/bad news story. While SYNNEX has pretty respectable margins relative to industry peers, an operating margin of just 1.5% is perilously thin. Similarly, while demand for IT in general is apt to remain pretty robust, quarter-to-quarter spending can be affected by short-term economic concerns and product introductions (like, perhaps, the new operating system from Microsoft (NASDAQ:MSFT)).
Valuation is where this story gets a little more interesting. First, let's dismiss that P/E and PEG stuff right off the bat -- I'm no great fan of them because earnings can be fictionalized by weird accounting rules, and PEG sometimes seems to me to be a comparison of accounting weirdness (the P/E part) and barely-thought-out guesswork from junior analysts (the G part).
On a cash-flow approach, the stock looks like it could be worth at least 15% more without any particularly heroic assumptions. Now, that doesn't leave much margin of safety relative to today's price, but SYNNEX's higher-than-normal return on capital may give some investors reason to accept a smaller-than-normal cushion to fair value. Do your own due diligence and you may (or may not) find that SYNNEX is a value. But that determination shouldn't have much to do with a single, flawed ratio like the P/E.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
