SUMMARY. Risk Level *

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1 January 09, 2015 Ingram Micro Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 05/25/2014 Current Price (01/08/15) $26.78 Target Price $ Week High $ Week Low $22.84 One-Year Return (%) Beta 1.03 Average Daily Volume (sh) 690,800 Shares Outstanding (mil) 156 Market Capitalization ($mil) $4,176 Short Interest Ratio (days) 2.26 Institutional Ownership (%) 95 Insider Ownership (%) 3 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 7.9 Earnings Per Share (%) 9.9 Dividend (%) N/A using TTM EPS 10.8 using 2015 Estimate 8.7 using 2016 Estimate 7.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (IM-NYSE) The world s leading technology distributor, Ingram Micro reported impressive third-quarter 2014 results wherein the bottom line came in line with the Zacks Consensus Estimate while the top line beat the same. Further, the company provided an optimistic guidance for the fourth quarter. We believe that the improving IT spending trend will help Ingram post better results, going forward. Moreover, its focus on high-margin markets and strategic acquisitions to increase market share are encouraging. Additionally, the company s focus on cloud computing products is expected to drive growth. However, a declining trend in PC shipments and intense competition remain the headwinds for Ingram Micro. Thus, we reiterate our Neutral stance on the stock. Below Avg., Type of Stock Large-Value Industry Retail/Whsl Cmp Zacks Industry Rank * 45 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,262 A 10,308 A 10,151 A 11,833 A 42,554 A ,384 A 10,909 A 11,238 A 12,996 E 45,527 E ,112 E 11,458 E 11,647 E 13,388 E 47,606 E ,658 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.43 A $0.55 A $0.53 A $0.88 A $2.37 A 2014 $0.44 A $0.54 A $0.62 A $1.00 E $2.58 E 2015 $0.57 E $0.67 E $0.72 E $1.10 E $3.08 E 2016 $3.41 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Ingram Micro Inc. (IM) is a leading distributor of information technology (IT) products and services worldwide. The fortune 100 company markets computer hardware, networking equipment and software products to roughly 200,000 reseller customers in 170 countries through 132 distribution centers worldwide. Founded in 1979, Ingram Micro is headquartered in Santa Ana, CA. The company has categorized its products into five segments: IT Peripheral: This segment includes a large number of standard IT peripherals, consumer electronic (CE) components and devices, and other devices. Key products within the IT peripherals category are printers, scanners, displays, projectors, monitors, panels, mass storage products and tape. LCD and plasma displays, enclosures, mounts and media players are the important CE components sold by the company. Key CE devices sold include cell phones, digital cameras, digital video players, TVs and game consoles. Other products included are automatic identification and data capture (AIDC); and point-of-sale (POS) products such as barcode/card printers. Systems: This segment includes variety of servers such as rack, tower and blade, portable personal computers, desktops and tablets. Software: The segment includes a variety of computer application software that help to store data electronically. Software products offered by the company include operating system software, entertainment software, middleware etc. Networking: The networking products include networking hardware, communication products and network security hardware. Mobility: Within this category, Ingram Micro sells mobile handsets, tablets, SIM cards, navigation devices, aircards, flash memory etc. Ingram Micro operates in four main geographic regions and reports its revenues under North America (generating 39% of 2013 revenues), Europe (25%), Asia Pacific (20%), Latin America (5%) and BrightPoint (11%) segments. Revenue by Segments - FY13 5% 11% 39% 20% 25% North America Europe Asia-Pacific Latin America BrightPoint The company sells products of approximately 1,400 worldwide suppliers of computer hardware, mobility, networking equipment, CE manufacturers, AIDC/POS and software publishers. Among them, Hewlett- Packard is the largest supplier which has contributed nearly 15% of Ingram Micro s fiscal 2013 total revenue. Equity Research IM Page 2

3 The company faces stiff price competition in each of the geographic regions in which it operates. Most of the competition currently comes from IT distribution companies, such as Tech Data and Synnex Corporation. Moreover, Ingram Micro competes with Avnet and Arrow in components and electronic products; Westcon in networking and security; D&H Distributing, Analog Devices Inc., ArchBrook Laguna and Petra in consumer electronics; and ScanSource and Bluestar in AIDC/POS products. REASONS TO BUY Ingram is one of the biggest players in the IT distribution business. The sheer size and business volume ensure bargaining power with product manufacturers and resellers. The company s geographical diversity makes it a logical choice for manufacturers seeking to increase international exposure. Moreover, it helps the company to mitigate the risk of operating abroad and enables it to take advantage of high growth opportunities in emerging markets, apart from nurturing its channel relationships. Ingram Micro has been restructuring its business by reducing headcount in all its operational regions and consolidating its mobility and distribution warehouse operations. In the first phase of action, Ingram Micro consolidated all its German mobility and distribution warehouse operations into a single unit. It also merged the Belgian warehouse with its Netherlands operations. These restructuring initiatives also enabled the company to operate from lower cost locations in Europe. The resultant annual cost savings are expected in the range of $80 to $100 million from the second quarter of fiscal With these business realignments in place, Ingram Micro expects to focus its business resources on high-margin growth opportunities, especially in cloud computing and datacenter solutions that will not only generate additional revenues but also support margins. Ingram s exposure to the small and medium business (SMB) segment could prove to be a key growth driver. Being one of the largest segments of the IT market in terms of customers and total revenue, the SMB end-user segment generates higher gross margins for distributors as suppliers find it difficult to establish their presence in the market. Most of the current spending by SMBs is centered on cloud computing because this enables significant cost savings. This is increasing the demand for technology and helping distributors such as Ingram. Research firm IDC expects worldwide spending by SMBs of around $560 billion in 2014, a 5.1% increase from Moreover, the firm predicts that SMB IT spending will be predominantly in the areas of telecommunications equipment, packaged software and IT services. Additionally, adoption of cloud-based services will gain prominence during this time. Ingram s focus on these segments is therefore likely to translate into strong growth. Strategic acquisitions have not only expanded Ingram Micro s geographic reach but also broadened its product portfolio. Moreover, certain acquisitions have given the company a strong foothold in the mid-range enterprise market. Of the many acquisitions made by the company in the recent past, the most significant are Brightpoint, Inc., Aptec Holdings Ltd. and Promark Technology Inc. In late Nov it also entered into a binding offer with Butler Capital to acquire Anovo, a Parisbased provider of after-sales support for phone and electronic devices, followed by a majority stake in Armada, the largest value-added technology distributor in Turkey, in early December. During 2013, Ingram Micro took over SoftCom, CloudBlue and Shipwire which enhanced its products and services portfolio. These acquisitions have expanded the company s presence in the high-margin products and services market that includes fee-for-service mobility device lifecycle solutions, traditional logistics solutions and cloud-based solutions. We believe these acquisitions will not only enhance the company s offerings but also help it to garner additional revenues. Equity Research IM Page 3

4 It is essential for an IT distribution company to monitor its internal as well as channel inventories. Companies like Ingram have to maintain close relationships with their resellers while checking the inventory s suitability for the purpose of satisfying customer demand. This helps to optimize the required investment in inventory. Ingram ensures that its catalog is updated with products most desired by its customers, and thereby improves inventory management, realizes higher-margin opportunities, and develops merchandising and pricing strategies that produce enhanced business results. Ingram s fortunes are directly tied to worldwide IT spending. Per a study by U.S. IT market research firm Gartner, global spending on IT could reach $3.8 trillion in 2014, a 3.2% increase from the 2013 level. Ingram is likely to benefit from this increasing spending trend more than other companies because it is the largest distributor of IT products with a large scale of operations and geographical diversity. Ingram Micro launched the Cloud Marketplace on a global platform through which channel partners and professionals can avail the required cloud services. First launched in North America, the Cloud Marketplace received huge response prompting its global launch. The Ingram Micro Cloud Marketplace has more than 200 cloud-based solutions from over 70 vendors, which include Salesforce.com, VMware and AVG Technologies. The company has added several cloud service providers such as Charter, Logix and Softlayer to expand its cloud-based offerings. Ingram Micro s initiative comes at an opportune moment as cost benefits of cloud computing are compelling companies to engage in massive information technology restructuring and upgrades. According to a study by IHS Inc., spending on cloud-based services should surge almost three times and reach $235 billion in 2017 from $78.2 billion in The research firm also stated that spending on cloudbased services will increase by 20% in 2014 to $174.2 billion from $145.2 billion in We expect this to work in favor of distributors like Ingram Micro. REASONS TO SELL The current phase of system upgrades and PC refresh cycles remain near-term concerns for Ingram Micro, as it generates significant revenues from PC sales. As per the latest IDC report, although temporary strength is seen in the PC market, in the long run (until 2018) PC shipments will decline as more and more consumers are adopting Smartphones and tablets. IDC expects PC shipments to decline 3.3% in 2015 as compared to an earlier forecast of just a 2.3% decline. Further, due to PC cannibalization, Ingram Micro has been focusing on reaching distribution contracts with many Smartphones and tablet manufacturers. However, in this segment, the company not only faces intense competition from large players but also from local distributors as well as online retailers which have restrained it from gaining any substantial market share. The IT distribution industry is mature with numerous players. While demand is expected to remain stable over the next few years, we believe that industry growth will decline to a slower, more sustainable level. This situation will make it increasingly difficult for Ingram Micro to maintain or grow market share, meaningfully increase sales growth or expand gross margins except through acquisitions. The IT distribution business is highly competitive and the company faces tough competition from major distributors, such as Arrow Electronics, Avnet, Tech Data and Synnex Corporation. Pricing among the large IT distributors appears to be rational but competitors are always introducing new pricing strategies, adversely affecting gross margins across the industry. Moreover, strategies adopted by rivals could put pressure on Ingram. Equity Research IM Page 4

5 The company s business is subject to seasonality and obsolescence. Ingram experiences particularly weak demand in the European region during the summer season resulting in lower revenue generation. Moreover, change in spending patterns during the festive season leads to allocation of funds to other consumer products that affects its business during this period. Ingram is particularly susceptible to rapid changes in the technology sector stemming from changing preferences and requirements. When customers shift to new products or platforms, it is necessary to build an inventory of new products and retire inventories of old products. This could at times result in inventories of old products that the company is unable to sell, thus impacting cash conversion. On the other hand, if it does not keep adequate stock of products, it may not be in a position to serve customers and might therefore, have to forego sales. Around 63% of fiscal 2013 revenues came from businesses outside the United States. Current economic conditions have strengthened the dollar versus a number of global currencies. This will suppress growth in terms of the U.S. dollar from markets that have weaker currencies. Although we believe local or constant currency basis is better for sales analysis, the headline growth number may decline as a result. Macro uncertainty persisting in Europe has reduced IT spending to an extent, which has resulted in year-over-year decline in revenue contribution from the region. RECENT NEWS Ingram Micro to Offer $500 Million Senior Unsecured Notes Dec 10, 2014 Ingram Micro has entered into an underwriting agreement with some investment bankers to sell $500 million worth of Senior Unsecured Notes. Notes, carrying a coupon rate of 4.950% and set to mature in 2024, will be issued at a discounted price of %. Ingram Micro will use $385 million of the net proceeds from the issuance to repay borrowings under its revolving trade accounts receivable-backed financing program in North America. The rest will be used for general corporate purposes, such as, working capital, repayment of other debts, capital expenditure, acquisitions and investments. Per the company, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. LLC are acting as joint underwriters for the offering. The company has a total borrowing capacity of $675 million under its North American trade accounts receivable-backed financing program which is going to expire in Nov The new Notes carry a lower coupon rate than the previous two $300 million of 5.25% Notes due 2017 and $300 million of 5.00% Notes due So the new notes will lower the average interest cost of Senior Unsecured Notes. Ingram Micro Expands into Turkish IT Market with Stake Buy Dec 1, 2014 Ingram Micro has recently bought a majority stake in Armada, the largest value-added technology distributor in Turkey. Per news sources, Ingram purchased the stakes through its Dubai-based subsidiary, Aptec Holdings Ltd. The recent move is in line with its strategy of expanding geographically and building adjacent capabilities. Although the financial terms of the deal have not been disclosed by the company, some media reports have reported that Ingram has bought a 58% stake in Armada for $24 million. Further, the world s largest computer products distributor intends to make a mandatory offer to buy the remaining shares of Armada per the regulations of the Turkish capital markets. Equity Research IM Page 5

6 Istanbul-based Armada was formed in 1993 and offers services like enterprise solution and channel development for SMB markets. Apart from this, the company offers credit, training and other professional services. The Turkish technology distributor generated sales of over $280 million in Ingram Micro believes that the acquisition will enhance its reach in the rapidly growing Turkish technology market. Moreover, this will help it to broaden its value-added offerings. Ingram Micro to Buy Anovo, Boost Global Service Portfolio Nov 28, 2014 After a year-long discussion, Ingram Micro finally signed a binding offer with the French investment company, Butler Capital, to acquire Anovo, a Paris-based provider of after-sale support for phone and electronic devices. The acquisition is expected to close during the first quarter of Founded in 1987, Anovo offers secure and sustainable reverse logistics solutions as well as repair, refurbishment and regeneration services in the technology market which extend the lifecycle of high-tech products. Annually, the company services over 20 million products through 5,000 associates operating across 11 countries. Although the financial terms of the deal have not been disclosed, news sources claim that it could be worth around 100 million. Further, Ingram Micro anticipates that the acquisition will add over $300 million as revenues annually and be slightly accretive to non-gaap earnings per share in The acquisition is expected to help Ingram Micro expand its global portfolio of service offerings and strengthen supply chain capabilities in the European and Latin American markets. Ingram Micro Q3 Earnings In Line; Q4 Guidance Encouraging Oct 23, 2014 Ingram Micro reported third-quarter 2014 non-gaap earnings (excluding amortization of intangible assets and reorganization charges) of $0.62 per share, which came in line with the Zacks Consensus Estimate. On a year-over-year basis, earnings increased 16.9%. Revenues Ingram Micro s third-quarter revenues of $11.24 billion beat the Zacks Consensus Estimate of $10.92 billion and increased 10.7% from the year-ago quarter. The company s Technology and other solutions revenues increased 5% year over year to $9.3 billion while its mobility business generated revenues of $2 billion, a year-over-year increase of 50%. Geographically, revenues from North America increased 19.3% on a year-over-year basis and came in at $5.13 billion. Revenues from Europe increased 9.3% year over year to $3.20 billion. Moreover, revenues from Latin America were up 17% year over year to $524.9 million. However, revenues from Asia-Pacific decreased 3.7% to $2.38 billion year over year. Operating Results Ingram Micro s gross margin came in 5.8% compared with 5.9% in the year-ago quarter. The company s operating expenses increased 11.6% year over year to $494.4 million. However, as a percentage of revenues, expenses were up 4 basis points (bps). The company also witnessed 0.6% increase in non- GAAP operating income which came in at $160.8 million, while margins were down 15 bps to 1.43%. Equity Research IM Page 6

7 Ingram Micro reported non-gaap net income of $98.5 million or $0.62 per share compared with $83.1 million or $0.53 in the year-ago quarter. Non-GAAP net income excludes the effect of intangible assets and reorganization charges. Balance Sheet & Cash Flow Ingram Micro exited the third quarter with cash and cash equivalents of $497.8 million compared with $470.7 million in the previous quarter. Accounts receivable were $4.86 billion. Total debt (including current portion) was $1.13 billion as against $1.16 billion in the last quarter. Guidance For the fourth quarter of 2014, Ingram Micro expects its revenues to increase 8% to 12% year over year and non-gaap earnings to range between $0.95 and $1.02 per share (mid-point $0.99). VALUATION Ingram Micro s shares are currently trading at 10.8X TTM earnings, a discount to the industry average of 13.7X and to the S&P 500 average of 18.6X. However, it is trading slightly above the mid-point of the historical range of 7.9X to 13.3X TTM earnings, which indicates limited possibility of upward movement from the current level. Moreover, the shares are trading at a discount based on our 2015 forward estimates. However, the current 25% discount to the industry average for 2015 is lower than the average discount for the historical period of 16.8%, which indicates downward movement. However, Ingram Micro s earnings growth potential for the next five years of 12.5% is higher than the industry average of 9.9%. Thus, given these mixed indications, we reiterate our Neutral recommendation on Ingram Micro and set a price target of $ Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Ingram Micro Inc. (IM) Industry Average S&P Tech Data Corp. (TECD) PC Connection, Inc. (PCCC) 14.5 N/A N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. Ingram Micro Inc. (IM) EV/EBITDA Industry Average S&P N/A 2.0 N/A Equity Research IM Page 7

8 Earnings Surprise and Estimate Revision History Equity Research IM Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of IM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will underperform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1105 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research IM Page 9