Tuesday, September 21, 2010

PC Connection

PC Connection (PCCC)





Current price (9/21/10: $6.85)

Summary
An online supplier of computer hardware and services, they sell to four main segments: small business, large accounts, government and home users.


Highlights
-6.70 per share in working capital (current assets - all liabilities)
-In Q2 2010 earned $.19
-Earned $.27 for the first half of 2010
-$.19 FCF for the first half of 2010

-Even while earnings were negative in 2009 PCCC was cash flow positive due to stepped up accounts receivable collection and inventory management.
-Historically have had positive CFO even in times of negative earnings.

Pro:
-Low overhead, only capex is for IT systems to support management
-Buying working capital get business for free
-Money left to buyback shares, $6m available, slowly buying
-gross margin improved in the SMB segment the largest sales segment
-negative 2% cash flow accruals

Cons:
-Retail could turn south and cash flow negative, could start borrowing for operations
-demand could stagnate for IT equipment purchases
-Suppliers have attempted to sell directly to customers in the past
-margins shrunk previous quarter
-Possible 20m capex over 5 years to upgrade system software
-DSO increased 2 days from 47 to 49 yoy

Valuation:
-$6.70 in net working capital
-Assuming a 10x multiple for the business at a $.45 level for the year is $4.50 for the business
-4.50 + 6.70 = $11.20
-Placing a 10x multiple on current earnings assuming no growth for the year gets us a $2.70 value for the business and $9.40 for everything.  This is the conservative estimate a 40% upside from here.

The following is the formula I used to find the cash flow accruals:
NI - CFO - CFI / (NOA + NOA(T-t))/2
NOA = (Total assets - cash) - (Total Liabilities - total debt)

Disclaimer - The author may hold a position in any stock mentioned in this blog.  This summary is neither a recommendation to buy or sell, please consult your investment advisor.