We upgrade Tech Data Corporation (TECD) from Neutral to Outperform indicating that it would perform above the market. The shares trade at a premium to the industry leader, Ingram Micro Inc (IM), and we believe the current premium valuation is warranted. Currently, Tech Data Corporation is trading at 13.0X our 2011 EPS estimate of $3.44, a premium to the industry average.

We also believe that there is room for further upside to the stock. The target price of $50.00 is based on a P/E multiple of 14.5X our 2011 EPS estimate, a premium to its peer group. Tech Data reported better-than-expected results for the third quarter, beating the Zacks Consensus estimates. Moreover, the company gave encouraging revenue guidance for the upcoming quarter.

We expect revenue to rebound modestly in fiscal 2011. The company’s balance sheet remains strong. We are encouraged by the strong earnings momentum, continued cost-cutting initiatives, diversified customer base, significant operating leverage, gross margin improvement, strong fundamentals and the improving IT spending environment.

Moreover the company’s healthy balance sheet gives the financial flexibility to expand market share, pursue acquisitions, pay off debt, repurchase shares and weather the current economic storm. The company ended the third quarter of 2010 with $1.24 billion in cash and $336.2 million in long-term debt. Its debt-to-equity ratio was just 0.16 while debt to total capitalization was 18% at the end of the third quarter.

Return on capital employed (ROCE) improved to 14.5% in the quarter from 5.3% last year. Moreover, cash flow from operations increased by $485.4 million year over year to $588.2 million in the first nine months of 2010. Tech Data expects its fourth quarter fiscal 2010 revenue to increase in the low-to-mid single digit range year over year.

This increase is due to improving IT demand combined with the strength of certain foreign currencies versus the U.S. dollar. However intense competition from Ingram Micro Inc., Synnex Corporation (SNX) and Westcon group, Inc., and weak industry pricing are reasons for concern. With more positives than negatives, we upgrade the stock to Outperform and the company’s current premium valuation remains justified.

Zacks Investment Research

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