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Wayside Technology Group: Negative Working Capital Through Drop Shipping

December 13, 2012 | About:
Mark Lin

Mark Lin

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Founded in 1982, Wayside Technology Group Inc. (WSTG) is an information technology channel company. It resells software and hardware developed by others and provide technical services directly to customers in the U.S. and Canada. It also distribute software through resellers indirectly to customers worldwide. It offers an extensive line of products from leading publishers of software and tools for virtualization, networking, software development, database modeling, security and other technically sophisticated domains.

WSTG operates through two segments, Lifeboat Distribution and the TechXtend segment. The Lifeboat segment distributes technical software through a worldwide network of corporate and value-added resellers, consultants, and systems integrators. The TechXtend segment sells technical software, hardware, and services for microcomputers, servers, and networks to individual programmers, corporations, government agencies and educational institutions primarily in the U.S. and Canada.

Valuation

WSTG currently trades at a trailing twelve months P/E of 9.21 and a trailing 12 months EV/EBITDA of 4.17. Its current P/E valuation represents a 13% discount to its five-year average P/E of 10.60. WSTG achieved a 19.3% ROE for the past 12 months and a five-year average ROE of 15.8%.

Financial and Business Risks

WSTG is almost debt-free with net cash of $15.3 million representing 29% of its current market capitalization of $53.1 million.

Management has indicated that resellers and publishers are increasing the volume of software products they distribute directly to end-users through electronic software distribution, subscription services, and on-line shopping services. They will be likely to pay lower referral fees for sales of certain software licensing agreements sold by WSTG or even decrease the volume of products sold through WSTG. The IT products and services industry is very competitive and price pressures are expected to continue.

WSTG's top three customers, CDW Corporation, Insight and Software House International accounted for

14.0%, 11.0% and 10.5% of its 2011 sales, respectively.

Business Quality and Capital Allocation

WSTG offers a wide range of products without increased inventory requirements, by using "drop shipping." Most suppliers or distributors will “drop ship” products directly to WSTG's customers, which reduces physical handling. This is reflected in a negative cash conversion cycle historically.

WSTG aims to compete on customer service, instead of size or cost. It prides itself on its software knowledge and focuses on representing more software vendors and training of sales account executives.

WSTG purchases from a diverse vendor base, with only two individual vendors, Veeam software and Quest accounting for more than 10% of its total purchases.

WSTG has been profitable for every single year in the past decade and generated positive free cash flow in 9 out of the last 10 years. It has paid dividends in every single year since 2003 and currently sports a dividend yield of 5.7% with a dividend payout ratio of 52%. Dividends are paid quarterly.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Working hard to be a better investor

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