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Paulo Santos, Think Finance (377 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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One of the most well-known facts in the stock market today, is that the PC market sucks. Testament to that has been the Intel (INTC) warning, Microsoft (MSFT) implosion in Windows sales, and Hewlett-Packard's (HPQ) never ending nightmare.

When this kind of obvious trend takes place, every trader and investor in the market usually notices and acts accordingly. What they do, in such events, is that they drop every name that's tainted with selling PCs and PC components. A lot of bathwater is thrown away in the process, and with it, a few babies.

I believe PC Connection (PCCC) might be one of those babies. The reasons are multiple; let me enumerate them.

Online seller with low overhead and nice margins

PC Connection is an online seller of information technology products and solutions. PC Connection works on a low overhead, with operating costs below gross margins coming to just 10.5% of revenues, which compares to Amazon.com's (AMZN) 25% in the latest quarter (sources: PCCC 10-Q; AMZN 10-Q).

PC Connection's low overhead allows it to be quite profitable even while competing in the cut-throat market that online selling is. PCCC shows operating margins of 2.7% and net margins of 1.6% in the latest quarter, versus AMZN's 0.8% and 0.1%.

Already collects sales taxes

Whereas Amazon.com still has to contend with starting to collect sales taxes, having recently started to do so in Texas (July) and California (September), PCCC was already collecting taxes everywhere. This means that PCCC stands to be favored by other online retailers starting to collect sales taxes. The following is from PCCC's Terms & Conditions:

We collect sales and use taxes for sales shipped to the State(s) of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Additional states may be added without notice. We shall not be liable for handling or customs charges for shipments outside the United States.

Cheap as they come

PCCC trades at a price/book of 0.9, a forward 2012 P/E of 8.4, has no long term debt and indeed carries $63.4 million in cash in its books, which is equivalent to 24% of its $263.5 million market capitalization.

Beat earnings, growing

Finally, PCCC has beaten earnings estimates in 3 of the last 4 quarters, is still growing revenues at a decent clip in spite of the PC worries (revenues grew 5.8% last quarter year on year, and are expected to grow 1% in the present quarter). Also, PCCC's earnings estimates have been rather stable, especially when compared to Amazon.com's plunging estimates.

At this point, the estimates don't seem to include any possible positive impact from competitors such as Amazon.com starting to collect sales taxes or from any increase in demand resulting from Windows 8.

Conclusion

All in all, PCCC seems like a decent investment if one can live with the pessimism that the present state of the PC market engenders. It's possible that the company might see upside from competitors starting to collect sales taxes, or from any increase in demand brought about by the launch of Microsoft's Windows 8 - none of this is reflected in the very cheap valuation that this well-performing company trades at.

Source: PC Connection, A Small Cap Opportunity