PC Connection PCCC
March 14, 2001 - 9:48pm EST by
david101
2001 2002
Price: 12.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Overview: PC Connection direct-markets computers, software, accessories, peripherals, networking and telecommunications products to small to medium sized businesses. Sales are generated through 3 distribution channels, with 76% coming from outbound telemarketing, 17% from catalogs and 7% via the Internet. They offer 100,000 products, quality-service and competitive pricing.

Sales: PCCC sales increased from $1.08B in 1999 to $1.45B, as 2000 was an exceptional year. Expect 2001 sales to be around $1.2B. Price-to-Sales (P/S) is 0.23.

Earnings: Due to the record 2000, earnings per share (EPS) were $1.23. Profit margins have been running around 2.2% for the past three years. EPS estimates are $1.08 for 2001 and $1.32 for 2002. PCCC is currently trading at a price-to-earnings (P/E) of 12 to 2001 earnings.

Debt/Cash: As of 9/30/00, PCCC only has $1MM in notes payable and $6.8MM in lease obligations. Cash was $12.7MM for the same period. While this position lessens the EV, I believe that with the current economic worries and with PCCC being a retail operation, a low amount of debt is prudent. They will not be hobbled with debt payments, and will have the capability to add debt, if needed, when the economy strengthens. Book value (B/V) is $5.63 per share of which goodwill is $0.40. P/B ratio is 2.3.

Options: Most tech firms have given away the store, so to speak, with liberal stock option grants over the past few years. These options are like hidden compensation costs because the company doesn’t expense the option costs until exercised. Further, the dilution impact to EPS can be significant, especially for a company like AMAT where the dilution can be as high as 15%. As of 12/31/99, PCCC employees had options totaling 1.88MM shares, with 2/3 of those options having strike prices $13.58 and greater, which are higher than the current price. From the SEC filing for the quarter ended 9/30/00, 686K shares were optioned through nine months of 2000. Not surprisingly, most of the shares were sold as the price rose to $70. Most of their remaining options are currently under water. I estimate that 1.1MM of the options are between $13.58 and $17.50, and if exercised, would only cause a 4.3% dilution on the current base of 24.4MM shares. Insiders own 80% of the company.

Competitors: Two larger competitors are CDWC and NSIT. For CDWC, 2000 sales were $3.8B, P/S of 0.81, EPS of $1.79, P/E of 17 on 2001 estimates of $1.96, profit margins of 4.2% and trading at 4.7 times B/V. NSIT had 2000 sales of $2B, P/S of 0.42, P/E of 15 on 2001 estimates, profit margins of 2.8% and trading at 3.1 times B/V. Thus, PCCC is trading at lower P/S, P/B and P/E ratios than its competitors.

Recommendation: Wait. Be patient. The market meltdown will take some time to play out. I will not buy until PCCC trades under $11, at a P/E of 10 or below (to borrow from Marty Whitman’s comments in the year-end 2000 edition of OID). As someone opined in my other investment club, “If I’m going to buy tech, I’m going to buy it on MY terms.” Buying at lower multiples helps to ameliorate the risk.

Catalyst

Lower P/S, B/V and P/E than competitors. Incented management. Projected earnings increase of 22% between 2001 and 2002. Small businesses generally begin any economic recovery, and PCCC should benefit accordingly as a major IT provider to small businesses.
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