U.S. technology distributors on track to recovery

Ingram Micro, Avnet Inc, Arrow Electronics -- which distribute products of technology bellwethers IBM, Apple and Hewlett-Packard -- are seen returning to growth as IT spending improves.

Avnet kicks off the reporting season for these companies when it reports on January 28.

Following year-over-year declines for the past four quarters, IT shipments through global distribution channels rebounded sharply in the fourth quarter of 2009, according to a recent industry report by Raymond James analyst Brian Alexander.

The improvement in North American IT shipments is likely being driven by a turn in corporate profits and less tight credit, both of which are leading indicators of IT spending, Alexander said.

We ultimately expect December quarter results to be at the higher end of recently revised guidance for Arrow and Avnet, driven by a solid month of December in both operating segments (electronics components and computing).

Last month, Arrow raised its December quarter earnings forecast to 57 cents to 63 cents a share on revenue of $3.8 billion to $4.2 billion, while Avnet upped it to 56 cents to 62 cents a share on revenue of $4.33 to $4.73 billion.

Strong numbers from Intel, IBM and Apple further add to the evidence that corporate spending is returning.

The companies, which distribute everything from personal computers to microchips, had grappled with dwindling demand and thinning margins for most part of last year.

This should be the last quarter of margin compression in this cycle, and the Street is underestimating the rebound we expect in gross margin in 2010, Goldman Sachs analyst Craig Hettenbach said in a note.

He expects Avnet's December quarter gross margins to come in at about 11.4 percent, down 1.1 percent year-over-year.

An extension in lead times and firmness in pricing, coupled with a mix shift in components toward higher-margin markets -- North America, and Europe, Middle East and Africa -- in the March quarter, should result in a sharp reversal in gross margin trends going forward, Hettenbach added.

Longer lead times -- the duration it takes to deliver a product after it has been ordered -- indicate higher demand.

Analyst Matthew Sheerin at Thomas Weisel, who has kept his market weight rating on Arrow, Avnet and Tech Data, upgraded Ingram -- the largest in the group -- to overweight Monday.

We are warming up to the name, as we believe Ingram is well positioned for the eventual upturn in IT spending and should see margin expansion over the next few quarters, particularly Europe, where it has had some operational issues and lost share, Sheerin said.

All of Ingram's suppliers -- EMC, IBM, Seagate Technology, Western Digital -- have posted very strong quarters ... So it isn't hard to see them having a good quarter, analyst Richard Kugele at Needham & Co said.

Analysts on average expect Ingram Micro to earn 50 cents a share, Avnet 59 cents a share, and Arrow 61 cents a share for the December quarter, according to Thomson Reuters I/B/E/S.

All three stocks are up 80 percent to 90 percent from their 52-week lows in March last year, while the broader Nasdaq Composite Index has gained about 80 percent as of Tuesday's close.

While analysts expect a good start to the year in terms of IT spending, they remain cautiously optimistic going ahead.

Thomas Weisel's Sheerin said there is speculation the expected IT refresh could be a late 2010 or early 2011 story as customers do not yet see that a priority, particularly in light of Windows 7 (which many are hesitant to adopt early).

Company Co's estimates Street Reporting Date

Avnet $0.56-$0.62 $0.59 Jan 28

Arrow Electronics $0.57-$0.63 $0.61 Feb 3

Ingram -- $0.50 Feb 18

(Reporting by Mansi Dutta; Editing by Unnikrishnan Nair)