Bearish On Computer Technology Related Companies

The following four companies all sell computers and related equipment to their customers:

1. CDW Corporation (CDWC);
2. Insight Enterprises, Inc. (NSIT);
3. Tech Data Corporation (TECD); and
4. Ingram Micro Inc. (IM).

The companies have differences in their customer base, offerings, and geographies. CDW and Insight are both mail order. Tech Data and Ingram Micro are in the computer wholesale industry.

I gathered the following financial metrics largely from Yahoo! Finance:

Let us look at each row and see what we learn.

• Market Capitalization: CDW has the largest market capitalization with nearly $4.8 billion. Ingram Micro has about 70% of the market capitalization of CDWC. Similarly, Tech Data has about 41% and Insight has about 18%.
• Employees: Even though CDW has the largest market capitalization, it has one of the lower employee counts. Or stated differently, the market capitalization for each CDW employee exceeds that for the other companies. Each CDW employee is worth about $870K. Similarly, Insight, $193K; Tech Data, $243K; and Ingram Micro, $239K. CDW market capitalization per employee is considerably higher than the others.
• Revenue: Similarly with employees, CDW has one of the lower revenues. Or stated differently, CDW has a higher market capitalization for each dollar of revenue. For each dollar of revenue, the companies are rewarded with the following market capitalizations:
  • CDW: $0.70;
  • Insight: $0.23;
  • Tech Data: $0.09; and
  • Ingram Micro: $0.10.
  As we see above, in comparison to its competitors, CDW is richly rewarded for its revenues.
• Gross Margins: CDW has the largest gross margins at roughly 16%. Insight comes close at 13% and the remaining two companies have significantly lower gross margins.
• EBITDA: CDW has one of the highest Earnings Before Interest Taxes and Depreciation. Again, CDW is richly rewarded for it EBITDA as indicated by market capitalization to EBITDA (market cap divided by EBITDA) ratios:
  • CDW: $10.19;
  • Insight: $6.14;
  • Tech Data: $8.95; and
  • Ingram Micro: $6.40.
• Operating Margins: CDW has the strongest operating margin by a large margin. It is more than double that of Insight's, its nearest competitor.
• EPS: The earnings per share are as listed above.
• P/E: CDW has the largest P/E ratio by a significant margin. The higher P/E ratio is attributable to its higher margins listed above.
• PEG: The Price Earnings Growth ratios for all companies vary from 0.9 to 1.2, a reasonably close range. CDW has the largest PEG ratio. CDW is rewarded for its better margins.
• P/S: Again, CDW enjoys the highest Price to Sales ratio.

I am generally bearish on the computer technology sector. Vista sales have been tepid and the U.S. economy is not as robust as it has been. Thus, I believe the computer technology related companies are vulnerable. In particular, I am biased against CDW. You will note that compared to Insight, CDW enjoys an approximate 6.8 times valuation even though its sales are less than double that of Insights. When I often buy computer peripherals, I check both CDW's and Insight's online offerings. Although I find Insight's web site more difficult to navigate, I often found its prices were slightly better than CDW's. Last week when I bought some items, I found the reverse. CDW was prices slightly less than Insight. Thus, I think CDW's margins might be under pressure if it is undercutting its competition.

Please note, because I live in Canada, I use the Canadian versions of both CDW's and Insight's web sites.

I have provided a link to a Yahoo! Finance chart showing the relative performance of the above stocks for year-to-date. CDW is down the most with a loss so far of about 15%.

All the companies that I mentioned are worth monitoring to gauge the health of the computer technology sector. As stated, I am bearish because Vista sales have been slow and U.S. economy appears to be slowing. Should the economy slow even further, I believe the technology companies will have even more difficulty moving product out the door.

Disclosure: I am short CDW shares.