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PC Connection (PCCC) is set to report earnings on Thursday (Aug 4, 2011) after market close so it is worth keeping an eye out for the company. A single analyst covers the stock and expects the company to report an earnings of $0.25/share on a revenue of $525 Million for the quarter.
What is PC Connection?
PC Connection is a catalog end to end computing system hardware provider for small business, education and government markets. The company markets its products through pcconnection.com, moredirect.com, govconnection.com, pcconnectionexpress.com, and macconnection.com, as well as through catalogs. It serves small to medium-sized businesses; enterprise customers; federal, state, and local government agencies; and consumers and small office/home office customers, as well as educational institutions. PC Connection, Inc. was founded in 1982 and is headquartered in Merrimack, New Hampshire. The products include computer systems; software and peripheral equipment; networking communications; notebooks and personal digital assistants; video, imaging, and sound devices; desktops and servers; net/com products; printers and printer supplies; storage devices; memory and system enhancements; and other accessories, as well as digital cameras and digital media players. It also provides design, installation, configuration, and other services through its personnel and third-party providers.
The stock currently trades at $7.82 per share giving the company a market value of $209 Million (stock price as of close of market July 28, 2011). With a trailing 12 month earnings of 0.93/share, the stock is currently valued at a nominal P/E ratio of 8.4. Here are some of the key valuation indicators for PCCC
|Gross Margin (TTM)||12.09%|
|Net Profit Margin (TTM)||1.23%|
|Nominal P/E ratio||8.4|
|Tangible Book Value||205.98|
|Net Current Asset Value||186.16|
|Long Term Debt||0|
|Cash on Hand||58.56|
Here is a $2 Billion in sales company selling at 0.1 Price per Sale or just $209 M in market value. The P/E ratio and the Price/Book also indicate a potentially undervalued company. While the profit margins are razor thin, the company has been able to maintain them at this level for the last 4 years while at the same time increasing its revenues and earnings, except for a small loss in 2009 when the recession impacted technology spending across all sectors (consumer, business, enterprise, education and government) that PC Connection operates in.
The company maintains inventory at close to 4% of its sales and turns it over 25 times a year on average. That means it keeps inventory on average less than 15 days. As a result, cash continues to circulate in the business. This gives them some advantage in terms of how much cash on hand they need to keep for working capital and it is no surprise that they have only $59 M in cash on hand, which is about 2.9% of sales. While this is very low compared to other companies that we have analyzed here so far, they do have a healthy current ratio about 2.3 so short term liquidity is not a problem.
Why is the Stock Undervalued?
First thing to recognize is that with inventory on average only staying 15 days at the warehouse, it’s value is pretty close to the market value. With that in mind, and the fact that the company seems to have fully depreciated its PPE, the book value is quite likely pretty accurate representation of the company assets (perhaps even a tad more conservative as PPE is likely to be understated in this case). This means that a 0.8 Price/Book is an attractive valuation for the company. If the company were to be bought in its entirety and liquidated orderly, a quick 25% profit could be realized.
Another way to look at the valuation is to invert the P/E ratio to give us the Earnings Yield. An 8.4 P/E ratio gives us an Earnings Yield of 11.9%. This is an attractive return on investment given that the company has had a good history of maintaining its margins and is growing its earnings year over year. If the business activity gathers momentum, sales and earnings growth will pick up.
How Much Should We Pay for the Stock?
Insight Enterprises (NSIT) is a direct competitor to PC Connection. It is much larger with Annual Revenues touching $5 Billion. NSIT currently trades at a Price/Book of 1.39, Price to Sales of 0.16 and a P/E ratio of 9.85. Given this comparable in mind, and to build in some margin of safety, I would be prepared to pay up to the Book Value for PCCC stock. This equates to $9.84/share and leaves us with another 40% potential gain if PCCC valuation draws parity with NSIT.