Value Line recently initiated coverage of Synnex Corporation (SNX) in its flagship product, The Value Line Investment Survey. The company provides information technology supply chain services to companies across the world. Essentially, it facilitates the outsourcing of IT distribution, contract assembly, and general logistic and business process services. Founded in 1980, Synnex held its initial public offering in 2003. As of March 31, 2013, it employed roughly 11,000 workers and is headquartered in Fremont, California,

Synnex operates in two main segments: distribution services (DS) and global business services (GBS). The former sells IT solutions and networking equipment for end-market use. GBS provides a range of services aimed at improving the client experience, as well as various tools to acquire and retain new customer relationships. The company runs 35 distribution and administrative facilities across a variety of nations.

Management has worked hard to increase global market reach through acquisitions in recent years. In 2010, the company’s Concentrix subsidiary acquired the worldwide tech support business of Indian company e4e Inc., which also operates divisions in Europe and North America in addition to its domestic business. This helps the company fortify its footprint in the emerging market. Over the past decade, global growth has become a focal point for Synnex. The top-line contribution from foreign operations has increased over the past few years, from the high teens in 2009 to 26% in 2012. Its Japanese operations are amongst the strongest performers in Synnex’s worldwide business, as it provided 11% of revenues last year.

While the need for a more efficient consumer experience is increasingly essential in today’s marketplace, Synnex operations are inherently exposed to risk. It faces competition from a slew of large- and mid-cap corporations like Arrow Electronics (ARW) and Ingram Micro (IM), as well as regional distributors. The nature of its business lends itself to a high level of turnover. Many of the company’s services, as it operates largely as a reseller in many arenas, yield low margins. Any revenue miss, or a cancelled contract, would put significant pressure on the bottom line. In 2012, over two-thirds of the company’s top line were derived from dealings with Hewlett-Packard (HPQ). 

Synnex stock has performed admirably of late, having doubled in value since mid-April. One driver for this increase in value was likely the announced acquisition of International Business Machine’s (IBM Free IBM Stock Report) global customer care business. The $505 million dollar deal will likely add up to $1.2 billion of revenue to GBS, as well as around $0.50 to the companywide bottom line in 2014. This ought to have a positive effect on Synnex’s operations, as the acquired segment produces about 10% EBITDA margins, much higher than those yielded by existing operations. We note that the acquisition is not yet finalized, so the estimates in our current report do not factor these figures in.

Subscribers interested in owning this Fortune 500 information services provider are advised to consult Value Line’s quarterly reports for Synnex, as well as any supplemental reports and relevant articles as important news items arise on www.valueline.com.

At the time this article was written, the author did not have positions in any of the companies mentioned.