PMRY is very cheap 13% over Net Net Working capital, 13% of sales, trading 65% of its untapped credit line, and about 90% of tangible book, for a one decent business and one lousy business. The investment thesis is at current price you are paying for close to the value of the VAR side of the business, and getting the valuable IT services business for about 10% of sales. We feel the downside is $6.50 a 7% discount to NNWC and 77% of tangible book, the upside is $16-21 over the next 18 months (18% downside and 120% upside).
The company takes limited risk on b-sheet, inventories turn 9.2x a quarter, A/r DSO are 68. Company has $170mn access to capital with about $17mn tapped on the line vs. $108mn EV. Capex is about $2mn a year total (nature of the business) with about $800,000,000 in annual revenue. The lousy business is Value Added Reseller, which runs at around 1.5% ebit margins , which I value at 7x EBITDA. This should be reasonable due to the huge IT service contracts they have recently won, which should accelerate VAR growth. PMRY’s decent business is IT services which should run on a normalized basis 7% EBIT with multi-year contracts diversified among education, state, federal, small business, Fortune 500. PMRY over the last five months have won $165mn worth of new contracts (165% of the current market cap).
Lets start why its cheap: Management has screwed up again. Last screw up was in Jan 2003, with the vendor receiveables which has been successfully corrected as far as I can tell (Days vendors rec outstanding still around 6 days, which is good, see previous write up). This time around, Pmry put in a new billing system on their IT services side from 1q05 which is the cause of problems.
What is the Value Added Reselling business worth:
$10mn ebitda, minimal capex, grows with IT services a 7 multiple = $5.55 a share. So investors are paying $29.8mn, for the IT services business, which should do at least $240mn in sales this year and probably close to $300mn in 2006 (given the large contract wins they have gotten recently). Company has average a 6.93% operating margin on the IT services business since 2001. IT services: enterprising consulting, Infrastructure consulting, and lifecycle services: ranging from ERP systems, implementing VOIP, Storage, Security, basically 20 specialized practices. PMRY Implements solutions for companies like Cisco, Q-logic, Computer Associates, EMC, 3 Com, IBM, HP, NEC, Sony, Sun, etc. Once Pomeroy works out the kinks on their IT services side, implied EBIT of $1.33 on $240mn and $1.67 on $300mn.
The downside risk in our opinion is $6.50 +/-
Net Net working capital $6.95 a share (-11.7% downside)
Untapped line of credit $12.09 a share (+53% upside)
Tangible book is $8.48 a share (+7.75% upside)
$560 mn var
15% of sales = $84mn = $6.67
7x ebitda = $5.55
$240mn IT services
60% of sales = $11.62
10x normalized ebit on 2005= $11.40
10x normalized ebit on 2006= $14.30
Ev/sls p/bk ev/ebitda
BELM .16 1.09 8.13
AGYS .29 1.54 8.0
TECD .12 1.15 7.65
IM .11 1.28 7.5
Average .17x 7.82x
Implied pmry value $7.62 $6.21
TIER .74 1.12 12
EDGW .72 .80 13
ANSR .88 1.70 15
Average .78 13.33
Implied pmry IT biz value $14.86 $15.23
Nearly all of the book value is above are heavy with goodwill
PMRY stated book is $17.49
The risks are clear: IT services restatement and management!
I believe that the downside should be mitigated even with this overhang: given discount to tangible book
Disclosure: we may buy or sell the stock without disclosing.
Trading at 13% over Net Net working Capital, 10% discount to tangible book, min capex
Balance sheet is fairly low risk: inventory turn 9.2x quarter/ A/R DSO’s xx, GE willing to loan them $12.17 per share that is untapped.
Investors paying 10% of sales for valuable IT sevices business: should do $250mn 2005 and $300mn in 2006
IT services business has won $170mn in long term contracts last 5 months
Reasonable probability of activists taking hold given screw ups of senior mgt
Potential for: a) special dividend (did it about 2 years ago) b) big buyback c) dutch tender
Private equity or going private given the valuation