My latest column is up at RealMoney.

I think a long Ingram Micro (IM) and short Tech Data paired trade can take advantage of differences in valuation regardless of what happens next in business spending.

While the two companies tend to take turns outperforming one another, over the last five years and since the market peak in early 2000 their cumulative performance is nearly identical. This time around, I’d expect both companies’ P/E multiples to converge, perhaps to 10 times estimated 2009 earnings. To budget in the possibility of further estimate cuts, I am also using the lowest estimate on the Street.

At 10 times the Street-low estimate of $2.38, Tech Data could see a further drop of nearly 30% from current levels. Ingram, meanwhile, could see a 20% share price rise if it were to trade at 10 times the 2009 low estimate of $1.86.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

Earlier today I said “Other signs are pointing to the consumer slowdown extending beyond just housing-related stores. The consumer was the last leg in the economy’s stool, so businesses had better take up the slack or we could be in for more of a slowdown than we already have.”

Right on cue, I learn that CDW’s Average Daily Sales Increase 25.3 Percent in June 2007 and 24.4 Percent in the Second Quarter of 2007:

Excluding Berbee sales in June 2007, and therefore on a non-GAAP basis, CDW’s average daily sales for June 2007 were $31.641 million, an increase of 15.9 percent compared to average daily sales for June 2006 of $27.293 million and total sales for June 2007 were $664.5 million, an increase of 10.7 percent compared to total sales of $600.4 million for June 2006.

That is a pretty darned good number. If it is happening across the board, and not as a result of CDW gaining market share, the GDP chart for tech equipment and software spending won’t look like this for long.

If it is an industry-wide phenomenon, there are positive implications for Tech Data (TECD), Ingram Micro (IM) and Mid Cap Watch List (Track at Marketocracy) member Synnex (SNX) as well as for their suppliers, primarily Hewlett Packard (HPQ - Annual Report).

Mid Cap Watch List (Track at Marketocracy) member Synnex (SNX) reported strong earnings just before it was added to the Watch List. It just filed its 10Q, so I decided to take a quick look. This post was featured at the Festival of Stocks.
Synnex is a Business Process Outsourcing (BPO) company. Other companies hire Synnex to manage business functions such as distribution, assembly and logistics. Nearly all of the company’s sales are to North American customers. Hewlett Packard products account for 28% of the company’s distribution sales.

The first thing I noticed was a large increase in accounts receivable, which rose more than 50% since November compared to a 9% increase in sales and resulted in negative cash flow from operating activities for the first six months of the year. It turns out the company changed the way it accounts for certain receivables:

The Company has established a revolving securitization arrangement (the “U.S. Arrangement”) through a consolidated wholly-owned subsidiary to sell up to $350,000 U.S. trade accounts receivable based upon eligible trade receivables (“U.S. Receivables”). The U.S. Arrangement expires in February 2011. The Company’s effective borrowing cost under the U.S. Arrangement is a blend of the prevailing dealer commercial paper rate and LIBOR plus 0.55% per annum. Prior to amending the U.S. Arrangement in February 2007, the Company recorded the previous U.S. Arrangement as an off-balance sheet transaction because the Company funded its advances by selling undivided ownership interests in the U.S. Receivables. The amended U.S. Arrangement requires the Company to account for this transaction as an on-balance sheet transaction because the Company funds its borrowings by pledging all of its rights, title and interest in and to the U.S. Receivables as security.

Including more of the receivables on the balance sheet will improve comparability in the future, and earnings will be of higher quality. Still, however, the company’s Canadian division can continue to carry as much as $125 million in receivables off balance sheet. The fact that such a large percentage of receivables was carried off-balance sheet in the past should encourage investors to be especially vigilant when it comes to earnings quality issues.

Synnex operates on thin profit margins (net profit margins are less than 1% of sales.) Given the potential for fixed cost leverage, minor increases in revenue could lead to very large earnings gains. However, the leverage also works the other way and the company could quickly experience losses should there be a revenue setback. Revenues are highly dependent on the end-market demand for IT products and services.

During the first six months of the fiscal year Synnex paid total consideration of approximately $115 million to acquire four companies. Despite the fact that this amount represents approximately 18% of the company’s market capitalization, the company claims that “The above acquisitions, individually and in the aggregate, did not meet the conditions of a material business combination and they were not subject to the disclosure requirements of SFAS No. 141, “Business Combinations.” The acquisitions were:

• Link2Support, a technical support and contact center based in the Philippines
• PC Wholesale, an IT distributor focused on refurbished and end-of-life equipment
• China Civilink, a China-based domain registration and web hosting provider
• Redmond Group, a consumer electronics distributor

Synnex also has a complicated relationship with MiTAC International, which owns 46% of the company’s shares. Matthew Miau serves as Chairman for both companies. MiTac is a major supplier to Synnex but supply agreements have been informal and there are no contracts or other assurances the relationship will continue. MiTAC introduced the company to several customers, including Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report), with whom the company’s account requires a continued relationship with MiTAC.

Due to the thin profit margins and concentrated ownership, Synnex is not the type of name I would hold for a long-term investment. To me, it seems better suited for trading opportunities when demand for IT products and services is growing rapidly.

This morning I announced that one of the additions to my Mid Cap Watch List (Track at Marketocracy) would be Synnex (SNX). Unfortunately when the portfolio changes are made on Friday it looks like I will paying a bit more for the stock, in the wake of yesterday’s strong earnings report.

SYNNEX Corporation (SNX), a business process services company, today announced financial results for the second quarter ended May 31, 2007.For the second quarter of fiscal 2007, revenues increased by 11% to $1.68 billion compared to $1.51 billion for the quarter ended May 31, 2006. Net income for the second quarter increased by 30% to $14.7 million, or $0.45 per share, compared with $11.3 million, or $0.36 per share in the prior year quarter.

“Our second quarter results mark a significant milestone on the road to evolving our business model from a traditional broad line distributor to a leading business process services company,” said Robert T. Huang, President and Chief Executive Officer.

Analysts were only expecting the company to earn $0.44 on $1.63 billion in sales. For next quarter the company is guiding toward $1.70-$1.75 billion in sales and $0.44-$0.46 in earnings per share, compared with the current consensus of $0.46 on $1.71 billion.