TD Synnex Falls After Beating Earnings Estimates. Cash Flow is the Culprit.

Dow Jones
Sep 24

Shares of TD Synnex fell sharply Thursday even as the major information technology company reported better-than-expected earnings along with quarterly guidance that was above Wall Street expectations.

TD Synnex stock dropped 8.8% to $262.50 on Thursday after ending Wednesday up 1.6%. Investors could be selling the stock based on heightened expectations for earnings and guidance or because of the company's negative free cash flow in the quarter.

Wall Street, either way, wasn't too impressed with the company's earnings for the fiscal third quarter ended Aug. 31.

The enterprise IT company posted adjusted earnings of $5.68 a share, up from $3.58 a year ago and above Wall Street's expectation for $4.70. Revenue grew 38% to $21.56 billion, beating the analyst consensus call for $18.91 billion, according to FactSet.

TD Synnex's guidance for the fiscal fourth quarter also was strong. The company expects adjusted earnings of $5.68 to $6.15 a share with revenue totaling $21.8 billion to $22.6 billion. That's above the consensus expectation for adjusted earnings of $4.87 a share and revenue of $19.44 billion, and would also mark substantial increases from a year ago.

"Enterprise AI adoption is progressing toward broader production deployments. Data center modernization remains a priority as organizations prepare for next-generation infrastructure requirements, while AI is driving new security, governance, and compliance requirements across technology environments," CEO Patrick Zammit said in the earnings release.

Zammit added that demand for the company's Hyve solutions segment, which designs and builds servers for cloud data centers, and its distribution segment support confidence in long-term growth opportunity.

TD Synnex's free cash flow, however, was negative to $975.6 million from positive free cash flow of $213.92 million a year ago. Morgan Stanley analyst Erik Woodring last week raised his TD Synnex price target to $374 from $334 but warned that free cash flow could be an issue for the company.

"The one risk is free cash flow, and the fact that distributors are counter-cyclical and this robust growth supports reinvestment into the business. The market should understand this dynamic, but a big negative free cash flow quarter could dampen otherwise robust fundamental results," Woodring said in the research note.

It could also be a "sell the news" event as analysts widely expected strong earnings and guidance. Shares had closed higher for five consecutive trading sessions before the earnings report.

Woodring noted that the other major risk for the earnings was "higher buyside expectations" as institutional investors could have a much higher bar for earnings and guidance.

The stock had risen 92% this year as of the closing bell on Wednesday, meaning the results could already be priced into the stock.

 

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