Stocktober #1: PC Connection

If you haven’t heard, Twitter investors may be getting a slug of cash they need to put to work.

This is a good thing, but it means we need to sharpen our pencils on where to reinvest this cash. The timing is decent, with the market down more than 20% and value indices also down double digits on the year. It’s time to turn over some rocks. 

I plan to read about at least one new company every day this month and will post the results here.

First up is a company called PC Connection (ticker CNXN).

Founded in 1982 to sell Macintosh computers, the company was named as the second fastest growing company in the US in 1987. In 1998 they IPO'd after growing 65% in the previous year. At year end 1999, the company had $1.1b of trailing sales, $22m of net profit, and a $550m market capitalization. 

After the tech bubble burst the company struggled with declining sales, and its market cap bottomed out at a mere $100m. This was the beginning of a very slow comeback in terms of both profits and valuation. Today the firm has a market cap of $1.2b on $3.3b of sales and $70m of trailing net income (about 17x PE). The share price has gone essentially nowhere since 2019. 

The business hasn’t changed that much, with PC sales still accounting for nearly half of revenue. The rest is made up of accessories, servers, and software. This is, unsurprisingly, a low margin operation, and EBIT margins have varied between 2.5% and 4% in recent years. But despite these low margins, high inventory turnovers and low fixed capital requirements give the firm around a 10% return on equity.

Revenue growth has been rather anemic over the past decade, with sales increasing from $2.2b to $2.9b. This makes sense given the overall saturation of PCs in the modern economy as well as tough competition from both Amazon and OEMs selling direct to consumers.

One thing that is notable about the stock is that almost no one talks about it. SumZero (a well-trafficked buy-side investment site) has zero writeups, and the most recent one on Value Investors Club (“VIC”) is from 2008, when it went by a different ticker (PCCC). 

That 2008 VIC writeup cites the stock’s valuation of “near tangible book value” as a key component of the thesis. In other words, it was not a pitch based on the quality or growth of the business. Such a thesis wouldn’t really apply in 2022, with the stock trading at around 2x book value. The stock also traded at about 3x EBITDA and 6x earnings in 2008, much cheaper than today.

Sell side coverage is also non-existent, with only Sidoti and Raymond James covering the company. Clearly, this is the type of boring, ignored stock that could get mispriced.

Still, given the business they are in, I fail to see why I should pay more than 10x earnings for this stock. If you want to invest in a business that sells PCs and accessories, why not own DELL or HPQ at 6-7x earnings?

I’m going to pass on this one for now. Let me know if I’m missing something.