Synnex Corporation: A Value Play In The Tech Sector (NYSE:SNX)

With technology stocks having had an impressive run since the start of the year, it would seem like value in this sector is hard to come by. At times, it may seem like the words “technology” and “value”, when used together, are an oxymoron. However, I believe one can find value, even in the tech sector, if one is willing to do a little bit of digging. In this article, I’m focused on Synnex Corporation (SNX), which may be one such value stock in the tech sector. I evaluate what makes this stock a potentially good long-term investment. So, let’s get started.

A Look Into Synnex

Synnex Corporation is a leading technology distribution, logistics, and integration services company with a presence on 6 continents and 40 countries. It has over 400 OEM partners, and distributes over 40K technology products across 25K resellers, systems integrators, and retailers. This massive scale, along with 225K employees, is what helps make Synnex a Fortune 200 company. Last year, the company generated over $23 billion in total revenue. It should be noted that Synnex intends to spin off Concentrix, its digital transformation and marketing business, in the second half of 2020, with current shareholders owning shares in both companies. For the purposes of this article, I will evaluate Synnex in its current form as a consolidated entity.

What I like about Synnex is that it sits at the cusp of a second digital revolution, which has and will continue to see a strong ramp-up in demand for security, collaboration, networking, and data center solutions. This is supported by its operating divisions, Synnex Westcon and Comstor. These two divisions go beyond traditional distribution services by providing advanced services and training. Specifically, the Comstor segment specializes in Cisco (CSCO) technology and helps Cisco’s partners and value-added resellers to design a comprehensive sales strategy with its specialized technical and market expertise. In addition, Synnex’s leading position is supported by its numerous accolades, such as being recognized as HP’s (HPE) Partner of the Year in August 2020.

I view this second digital revolution as an attractive opportunity, as it results in both strong revenues and a higher-margin profile for the business. As seen below, revenue has grown at a fast clip in recent years, with a 3-year CAGR of 19.1% from 2016 to 2019. Even more impressively, the operating margin (calculated as op income divided by revenue) increased at an impressive rate, from 2.8% in 2016 to 3.8% in 2019, due to higher-margin services and operating efficiencies. This resulted in a much faster operating income CAGR of 31.8% over the same time period.

(Source: Created by author based on company financials)

As seen above, Synnex’s trailing 12 months’ results have been impacted by the risks and headwinds stemming from COVID-19. This resulted in a 2% YoY consolidated revenue decline on a constant currency basis. Consolidated non-GAAP operating income declined by 34% YoY due to the extra cost of running the business during the pandemic. This resulted in an operating margin of 2.9%, which takes the company back to levels last seen in 2018. Management expects these difficulties to continue into the current third quarter. However, what’s encouraging is that they see an acceleration of higher value offerings, as noted on the last conference call (emphasis added by author):

“While the effects of this devastating pandemic on our clients and our business volumes in the long-term remains uncertain, a silver lining appears to be an acceleration to some of our high-value offerings by our clients. Our ability to deliver exceptional services globally and to leverage our technology, digital and analytics expertise allows us to be a full service partner for our clients.”

In addition, Synnex achieved 90% staff productivity by the end of Q2, and expects to gain full productivity by the end of Q3. Looking forward, I’m encouraged by the minimal revenue impact that the company has seen, and expect the staff productivity and margin issues to be worked out as Synnex adjusts to operating in the current environment.

Turning to earnings estimates, it appears that 2020 is expected to just be a speed bump, as analysts expect 2021 EPS to ramp up by 24%. This results in a forward P/E of just 9.4 (based on 2021 EPS), which puts Synnex shares in solid value territory.

In addition, analysts appear to be rather bullish on the shares, with an average rating of 4.6, with 4 being “Bullish” and 5 being “Very Bullish”, and a price target of $139, which sits comfortably above where the shares are trading at today.

Investor Takeaway

Synnex Corporation is a leading technology distribution, logistics, and integration services company with a presence on 6 continents and 40 countries. While COVID-19 has presented the company with headwinds, I see it as being a speed bump as the company adapts to operating in the current environment. Longer term, I see Synnex as benefiting from a second digital revolution as IT spend ramps up with respect to security, collaboration, networking, and data centers.

I see the shares as being attractive at the current price of $125.17 and a forward P/E of 11.7. Shares appear to be even cheaper based on 2021 EPS estimates, which would bring the P/E down to 9.4. As such, I have a favorable view of the stock and see further upside potential for this value play in the tech sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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