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