Buy Price
Holding Type
Investment Theme
Trade Date
May 3, 2016

PCM Inc. (PCMI)… (May 3, 2016)

PCM is a value-added reseller of IT hardware, software, and services. Competes with CDW, PC Connection (PCCC) and Insight (NSIT).

What is the crux of the bet?

PCMI is a $120m market cap company with (as of 1Q16) $150m in net debt. Made $45m in acquisitions in 2015 to gain scale and add product offerings. Now similar size to rival PCCC with $2.2bn in sales (vs. PCCC at $2.6bn).

Scale is extremely important to a VAR and PCMI got a few very good deals with En Pointe and Systemax NA operations. Integrating these will bring earnings to $1.30-1.40/share (stock <$10/share currently).

These higher earnings are still low compared to peers: PCCC and NSIT at 1.5-2% net margins while 2016 guidance ($1.30-1.40 EPS) indicate ~75-80bps net margins. Company thinks they can get to peer levels. To be conservative, say they achieve 1% net margins with no additional revenue growth ($2.2bn) which would mean $22m in earnings. At 10x (peer multiples at 10-13x), that would mean >80% upside to current $120m market cap.

Balance sheet isn’t great but the company is selling some real estate assets at good prices. Leverage probably runs 3.75x right now but could easily be 2.5x by 2017.

If execution goes well, I would be willing to purchase additional shares at a higher price.

UPDATE: I sold this stock at $17.73 on August 8, 2016. It turned out that the market was underestimating the earnings power of the 3 recent acquisitions the company made. They revised 2016 earnings guidance from $1.24-1.40 to $1.51-1.64 which is a significant 20% increase at the mid-point. The stock ran from the $10-level (where I purchased) to $18 at one point. The bet changed from baking in no expectations to paying an industry multiple for the business which led me to sell.