Analysts Predict Nothing but Good Things for Micro D in Both Growth and Earnings
Santa Ana-based Micro D, the nation’s leading distributor of personal computer products, has been growing rapidly the past three years, and at least two analysts see nothing but continued expansion for a company that has enjoyed a remarkable turn-around.
In 1987, Micro D earned $5.5 million, an 82% increase over 1986, on sales of $352 million. Analysts are projecting an even better year for 1988. For the first quarter, the company earned $1.7 million on sales of $116 million, compared to earnings of $1.4 million on sales of $81.8 million for the same period a year earlier.
That is a big stride forward since 1983, when Micro D lost $3 million on revenues of $119 million and was ranked fourth in the PC parts-distributor market.
“Two and a half years ago, we were flat on our backs. We were in no position to command exclusive relationships with manufacturers because there was some uncertainty that we would even continue to exist,” Micro D Chairman Linwood A. (Chip) Lacy said. “We had to build back our business base.”
PC distributors, as a whole, a $2.5-billion industry, have ridden the wave of the surging PC market, which in 1987 grew by 40% and which analysts said should continue to grow by up to 30% in 1988.
“Nineteen eighty-seven was a great year for personal computers. And as long as people buy PCs and related products, the distributors will continue to benefit,” said Michael Davis a securities analyst with Lovett, Mitchell Webb & Garrison in Houston. He noted that distributors are a low-risk way to play the computer industry because they are not buffeted by technological change.
“The industry is humming, and you are seeing more and more products going through distributors,” said Robert Anastasi, a technology analyst with Robinson Humphrey Co.in Atlanta.
Micro D’s line of work may not be as interesting as the companies that make the products it sells, but it certainly has found a money-making formula. Micro D serves as a computer industry middleman. It buys products from the scores of companies that write software and manufacture parts and peripherals for Apple and IBM-compatible computers and then resells those products to retailers on short notice.
Software distribution constitutes 45% of Micro D’s business. An important step in Micro D’s rejuvenation is its exclusive agreement to distribute Claris software for Apple Computers, according to Lacy. It also stocks and distributes from seven locales around the country a host of hardware products such as printers, monitors, hardcards, modems, power supplies; just about everything but the micro-processor unit itself.
These products are often produced by small specialty companies that lack their own distribution network. Micro D derives another 10% of its revenues from handling Toshiba and NEC laptop computers, an area in which Lacy said Micro D will expand.
In fact, Micro D has been expanding in several directions. In March, it purchased a Canadian distribution center for $25 million. Lacy said Micro D is actively looking to acquire a European distribution company as well. The company has set a growth target of $1 billion in sales by 1991.
Micro D is expanding its management team to handle the company’s growth. Last week, the company announced the appointment of President Harold L. Clark to the newly created job of vice chairman. Micro D management is searching for an executive outside the company to fill the position vacated by Clark and has hired Sanat Dutta from American Express to head operations.
Adding to Telemarketing Force
It is also beefing up its telemarketing force from 20 to 40 people this year and will focus on offering technical support for some of the more sophisticated products it sells, such as engineer work stations, desk-top publishing and networking systems.
Micro D fills 2,500 orders a day, with an average order price of $800. While it services mainly smaller retail stores, it also distributes to large chains, including Computerland and MicroAge.
The company has targeted other major accounts, such as BusinessLand and Sears Computer Centers, a strategy that should increase its market share and accelerate a general trend of consolidation in the business, according to Anastasi, of Robinson Humphrey.
However, the big volume approach has its price in the form of narrow profit margins, Anastasi said. At 2.6% for 1987, Micro D has one of the narrowest profit margins in the business.
“It’s true that profit margins are not what they should be,” Lacy said. “But what the analysts don’t understand as well as they ought to is that we are a very strong seller of what are considered commodity products in the computer business,” and that any commodities business operates on high volume and low margins.
That criticism aside, analysts are forecasting strong growth in sales and earnings for the rest of this year. Davis of Lovett Mitchell expects Micro D sales to reach $466 million, a 32% increase over 1987 and is projecting long-term growth of 20% per year.
Both Davis and Anastasi are looking for Micro D earnings per share to reach $1.05-$1.15 in 1988, up from 77 cents a share in 1987. Both also characterize the current stock price as cheap, which, at Friday’s close of $8.875 a share, is trading at about eight times earnings. That compares to 12 times earnings for the Standard & Poor’s Index.
The stock traded as low as $4.375 in early 1987 but reached a high of $14.50 before the October crash.
