Intrinsic value of PC Connection - CNXN

Previous Close

$30.81

  Intrinsic Value

$25.67

stock screener

  Rating & Target

hold

-17%

Previous close

$30.81

 
Intrinsic value

$25.67

 
Up/down potential

-17%

 
Rating

hold

We calculate the intrinsic value of CNXN stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,970
  3,038
  3,117
  3,204
  3,301
  3,408
  3,524
  3,650
  3,785
  3,930
  4,086
  4,251
  4,428
  4,616
  4,815
  5,026
  5,249
  5,485
  5,735
  5,998
  6,276
  6,570
  6,879
  7,204
  7,547
  7,908
  8,288
  8,688
  9,109
  9,552
Variable operating expenses, $m
  2,881
  2,947
  3,022
  3,107
  3,201
  3,304
  3,416
  3,538
  3,669
  3,809
  3,951
  4,112
  4,282
  4,464
  4,656
  4,860
  5,076
  5,305
  5,546
  5,801
  6,070
  6,353
  6,652
  6,967
  7,299
  7,648
  8,016
  8,403
  8,809
  9,237
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,881
  2,947
  3,022
  3,107
  3,201
  3,304
  3,416
  3,538
  3,669
  3,809
  3,951
  4,112
  4,282
  4,464
  4,656
  4,860
  5,076
  5,305
  5,546
  5,801
  6,070
  6,353
  6,652
  6,967
  7,299
  7,648
  8,016
  8,403
  8,809
  9,237
Operating income, $m
  89
  92
  94
  97
  100
  104
  107
  112
  116
  121
  134
  140
  146
  152
  158
  165
  173
  180
  189
  197
  207
  216
  226
  237
  248
  260
  273
  286
  300
  314
EBITDA, $m
  106
  108
  111
  114
  118
  121
  126
  130
  135
  140
  146
  152
  158
  165
  172
  179
  187
  196
  204
  214
  224
  234
  245
  257
  269
  282
  295
  310
  325
  340
Interest expense (income), $m
  0
  0
  0
  1
  1
  1
  2
  2
  3
  4
  4
  5
  6
  7
  7
  8
  9
  10
  11
  13
  14
  15
  17
  18
  20
  21
  23
  25
  26
  28
  31
Earnings before tax, $m
  89
  91
  93
  96
  99
  102
  105
  109
  112
  117
  129
  134
  139
  144
  150
  156
  162
  169
  176
  183
  191
  200
  208
  218
  227
  237
  248
  259
  271
  284
Tax expense, $m
  24
  25
  25
  26
  27
  27
  28
  29
  30
  31
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  54
  56
  59
  61
  64
  67
  70
  73
  77
Net income, $m
  65
  67
  68
  70
  72
  74
  77
  79
  82
  85
  94
  98
  102
  105
  110
  114
  118
  123
  129
  134
  140
  146
  152
  159
  166
  173
  181
  189
  198
  207

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  763
  780
  800
  823
  848
  875
  905
  937
  972
  1,009
  1,049
  1,092
  1,137
  1,185
  1,236
  1,291
  1,348
  1,409
  1,473
  1,540
  1,612
  1,687
  1,766
  1,850
  1,938
  2,031
  2,129
  2,231
  2,339
  2,453
Adjusted assets (=assets-cash), $m
  763
  780
  800
  823
  848
  875
  905
  937
  972
  1,009
  1,049
  1,092
  1,137
  1,185
  1,236
  1,291
  1,348
  1,409
  1,473
  1,540
  1,612
  1,687
  1,766
  1,850
  1,938
  2,031
  2,129
  2,231
  2,339
  2,453
Revenue / Adjusted assets
  3.893
  3.895
  3.896
  3.893
  3.893
  3.895
  3.894
  3.895
  3.894
  3.895
  3.895
  3.893
  3.894
  3.895
  3.896
  3.893
  3.894
  3.893
  3.893
  3.895
  3.893
  3.894
  3.895
  3.894
  3.894
  3.894
  3.893
  3.894
  3.894
  3.894
Average production assets, $m
  86
  88
  90
  93
  96
  99
  102
  106
  110
  114
  118
  123
  128
  134
  140
  146
  152
  159
  166
  174
  182
  191
  199
  209
  219
  229
  240
  252
  264
  277
Working capital, $m
  324
  331
  340
  349
  360
  371
  384
  398
  413
  428
  445
  463
  483
  503
  525
  548
  572
  598
  625
  654
  684
  716
  750
  785
  823
  862
  903
  947
  993
  1,041
Total debt, $m
  5
  11
  19
  27
  35
  45
  56
  67
  79
  93
  107
  122
  138
  155
  173
  193
  213
  234
  257
  281
  307
  333
  361
  391
  422
  455
  490
  526
  565
  605
Total liabilities, $m
  271
  277
  284
  292
  301
  311
  321
  333
  345
  358
  372
  388
  404
  421
  439
  458
  479
  500
  523
  547
  572
  599
  627
  657
  688
  721
  756
  792
  830
  871
Total equity, $m
  492
  503
  516
  531
  547
  564
  584
  605
  627
  651
  677
  704
  733
  765
  798
  832
  869
  909
  950
  994
  1,040
  1,088
  1,139
  1,193
  1,250
  1,310
  1,373
  1,439
  1,509
  1,582
Total liabilities and equity, $m
  763
  780
  800
  823
  848
  875
  905
  938
  972
  1,009
  1,049
  1,092
  1,137
  1,186
  1,237
  1,290
  1,348
  1,409
  1,473
  1,541
  1,612
  1,687
  1,766
  1,850
  1,938
  2,031
  2,129
  2,231
  2,339
  2,453
Debt-to-equity ratio
  0.010
  0.020
  0.040
  0.050
  0.060
  0.080
  0.100
  0.110
  0.130
  0.140
  0.160
  0.170
  0.190
  0.200
  0.220
  0.230
  0.240
  0.260
  0.270
  0.280
  0.290
  0.310
  0.320
  0.330
  0.340
  0.350
  0.360
  0.370
  0.370
  0.380
Adjusted equity ratio
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645
  0.645

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  65
  67
  68
  70
  72
  74
  77
  79
  82
  85
  94
  98
  102
  105
  110
  114
  118
  123
  129
  134
  140
  146
  152
  159
  166
  173
  181
  189
  198
  207
Depreciation, amort., depletion, $m
  17
  17
  17
  17
  17
  18
  18
  18
  19
  19
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
Funds from operations, $m
  82
  83
  85
  87
  90
  92
  95
  98
  101
  104
  106
  110
  114
  118
  123
  128
  133
  138
  144
  150
  157
  164
  171
  179
  187
  195
  204
  213
  223
  233
Change in working capital, $m
  6
  7
  9
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  44
  46
  48
Cash from operations, $m
  75
  76
  77
  78
  79
  80
  82
  84
  86
  88
  89
  91
  94
  98
  101
  105
  109
  113
  117
  122
  127
  132
  137
  143
  149
  156
  162
  170
  177
  185
Maintenance CAPEX, $m
  -8
  -8
  -8
  -9
  -9
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
New CAPEX, $m
  -3
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
Cash from investing activities, $m
  -11
  -10
  -10
  -12
  -12
  -12
  -12
  -14
  -14
  -14
  -16
  -16
  -17
  -17
  -19
  -19
  -20
  -21
  -22
  -24
  -24
  -26
  -27
  -28
  -30
  -31
  -33
  -35
  -36
  -38
Free cash flow, $m
  65
  66
  66
  67
  67
  68
  69
  71
  72
  74
  73
  75
  78
  80
  83
  85
  88
  91
  95
  98
  102
  106
  110
  115
  119
  124
  130
  135
  141
  147
Issuance/(repayment) of debt, $m
  5
  6
  7
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  25
  27
  28
  30
  31
  33
  35
  36
  38
  40
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  5
  6
  7
  8
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  25
  27
  28
  30
  31
  33
  35
  36
  38
  40
Total cash flow (excl. dividends), $m
  70
  72
  73
  75
  76
  78
  80
  82
  85
  87
  88
  91
  94
  97
  101
  105
  109
  113
  118
  122
  127
  133
  138
  144
  151
  157
  164
  172
  180
  188
Retained Cash Flow (-), $m
  -10
  -11
  -13
  -15
  -16
  -18
  -19
  -21
  -22
  -24
  -26
  -27
  -29
  -31
  -33
  -35
  -37
  -39
  -41
  -44
  -46
  -49
  -51
  -54
  -57
  -60
  -63
  -66
  -70
  -73
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  60
  61
  60
  60
  60
  60
  61
  61
  62
  63
  62
  63
  65
  66
  68
  70
  72
  74
  76
  79
  81
  84
  87
  91
  94
  98
  101
  106
  110
  114
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  58
  56
  52
  50
  47
  44
  41
  38
  36
  33
  29
  27
  25
  22
  20
  18
  16
  14
  12
  10
  8
  7
  6
  5
  4
  3
  2
  2
  1
  1
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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PC Connection, Inc. is a provider of a range of information technology (IT) solutions. The Company conducts its business operations through three business segments: small- to medium-sized businesses (SMB), Large Account and Public Sector. The Company enables customers to design, enable, manage and service their IT environments. The Company's IT products include computer systems, software and peripheral equipment, networking communications, and other products and accessories that the Company purchases from manufacturers, distributors and other suppliers. The Company also offers services involving design, configuration and implementation of IT solutions. The Company markets its products and services through its Websites, including www.connection.com, www.connection.com/enterprise, www.connection.com/publicsector, and www.macconnection.com. It uses a combination of outbound telemarketing, including some on-site sales solicitation by business development managers.

FINANCIAL RATIOS  of  PC Connection (CNXN)

Valuation Ratios
P/E Ratio 17.1
Price to Sales 0.3
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 24.1
Price to Free Cash Flow 37.3
Growth Rates
Sales Growth Rate 4.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -7.7%
Cap. Spend. - 3 Yr. Gr. Rate 8.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 7.2%
Ret/ On Assets - 3 Yr. Avg. 7.8%
Return On Total Capital 11.6%
Ret/ On T. Cap. - 3 Yr. Avg. 12.3%
Return On Equity 11.6%
Return On Equity - 3 Yr. Avg. 12.3%
Asset Turnover 4.1
Profitability Ratios
Gross Margin 13.8%
Gross Margin - 3 Yr. Avg. 13.4%
EBITDA Margin 3.3%
EBITDA Margin - 3 Yr. Avg. 3.3%
Operating Margin 3%
Oper. Margin - 3 Yr. Avg. 3%
Pre-Tax Margin 3%
Pre-Tax Margin - 3 Yr. Avg. 3%
Net Profit Margin 1.8%
Net Profit Margin - 3 Yr. Avg. 1.8%
Effective Tax Rate 40%
Eff/ Tax Rate - 3 Yr. Avg. 39.7%
Payout Ratio 22.9%

CNXN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CNXN stock intrinsic value calculation we used $2911.883 million for the last fiscal year's total revenue generated by PC Connection. The default revenue input number comes from 0001 income statement of PC Connection. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CNXN stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for CNXN is calculated based on our internal credit rating of PC Connection, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of PC Connection.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CNXN stock the variable cost ratio is equal to 97%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for CNXN stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for PC Connection.

Corporate tax rate of 27% is the nominal tax rate for PC Connection. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CNXN stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CNXN are equal to 2.9%.

Life of production assets of 10.6 years is the average useful life of capital assets used in PC Connection operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CNXN is equal to 10.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $482.252 million for PC Connection - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 26.703 million for PC Connection is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of PC Connection at the current share price and the inputted number of shares is $0.8 billion.

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COMPANY NEWS

▶ PC Connection: 3Q Earnings Snapshot   [Nov-01-18 05:49PM  Associated Press]
▶ PC Connection: 2Q Earnings Snapshot   [05:19PM  Associated Press]
▶ May Top Cheap Stock To Invest In   [May-15-18 10:02AM  Simply Wall St.]
▶ PC Connection: 1Q Earnings Snapshot   [May-03-18 05:35PM  Associated Press]
▶ Stephen P. Sarno Joins Connection as CFO   [Mar-29-18 04:10PM  Business Wire]
▶ PC Connection posts 4Q profit   [Feb-15-18 04:57PM  Associated Press]
▶ Connection® Announces a Special Dividend to Shareholders   [Dec-18-17 04:37PM  Business Wire]
▶ PC Connection posts 3Q profit   [Oct-26-17 05:41PM  Associated Press]
▶ PC Connection posts 2Q profit   [Jul-28-17 12:45AM  Associated Press]
▶ ETFs with exposure to PC Connection, Inc. : July 4, 2017   [Jul-04-17 02:46PM  Capital Cube]
▶ ETFs with exposure to PC Connection, Inc. : June 22, 2017   [Jun-22-17 03:33PM  Capital Cube]
▶ Connection® Wins HP MPS Best in Class 2016 Award   [May-31-17 05:00PM  Business Wire]
▶ PC Connection posts 1Q profit   [Apr-20-17 04:56PM  Associated Press]
▶ Bear of the Day: Cabela's (CAB)   [Mar-02-17 07:00AM  Zacks]
▶ PC Connection posts 4Q profit   [Feb-01-17 05:40PM  Associated Press]

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