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Unknown & Under-Loved Micro-Caps - Wayside Technologies

August 19, 2013 | About:
I) Overview and History

Market Cap: $57.56 Million

Share price: $12.30

Diluted 2012 EPS: $1.19

Outstanding Diluted Shares: 4.628 Million

Current Yield: 5.2%

Five-year average E.P.S growth: 10.53%

Five-year average sales growth: 10.83%

2012 effective tax rate: 39.6%

Book Value per Share: $7.08

Wayside Technology Group Inc. incorporated in 1982 and became a public company in 1995. [/i]
[i]“Wayside Technology Group Inc. is a unified and integrated technology company providing computing products and solutions to corporate IT organizations, government agencies and educational institutions directly and through computer reseller networks. We're a public company (WSTG) founded in 1982 and with sales of $297 million in 2012. Wayside Technology Group subsidiaries include
Lifeboat Distribution, an international distributor of software products and services; TechXtend (formerly Programmer's Paradise), a leading value-added reseller of software, systems and solutions across the United States and Canada. Wayside also provides private-label online shopping, sales lead handling, and software fulfillment services to software publishers through its International Software Partners (ISP) channels services unit. Wayside reports ISP financials under its Lifeboat segment. Wayside Technology has been profitable and paid dividends to shareholders for the past 42 quarters (as of 30-Jun-13). For 2012, we posted record revenues of $297 million and net income of $5.5 million. Wayside Technology Group has also been recognized as one of the Best Places to Work in New Jersey.” – Company websiteThe company operates distribution facilities in Shrewsbury, N.J., and Mississauga, Canada, using a “drop ship” method to utilize more efficient inventory turns at lower inventory costs. A few large companies contribute a large amount of the revenues currently and may cause a material impact if accounts are lost. “For the year ended December 31, 2012, Software House International, CDW Corporation, and Insight accounted for 13.4%, 12.4% and 11.1%, respectively, of consolidated net sales.” Wayside Technology Group Inc. and its subsidiaries had 118 full-time employees and two part-time employees.

II) Record

· From 2003 shareholder equity has increased almost three-fold from $11.2 million to $32.28 million in 2012.

· No long-term debt — only contractual obligations of 792,000 through 2017, 736,000 of which is for operating lease obligations.

· Record revenues and operating income while gross margins have compressed slightly.

Share buy back in 2012 of 40,921 shares at an ACB of $11.72.

(4) On July 31, 2008, the Company approved the increase of its Common Stock repurchase program by 500,000 shares. The Company expects to purchase shares of its Common Stock from time to time in the market or otherwise subject to market conditions. The Common Stock repurchase program does not have an expiration date.

(5) On October 23, 2012, the Board of Directors approved, and on October 29, 2012, the Company entered into a written purchase plan intended to comply with the requirements of Rule 10b5-1 under the Exchange Act, as amended (the “Plan”). Purchases involving shares of the Company’s Common Stock under the Plan commenced October 29, 2012, and the Plan is intended to be in effect until October 29, 2014. Pursuant to the Plan, the Company’s broker shall effect purchases of up to an aggregate of 350,000 shares of Common Stock.

Note that the buybacks are retained in the treasury for future compensation awards to employees. The business has been retaining earnings at a very impressive clip, with no negative declines year-over-year for the last 10-years. Operating income has quadrupled since 2004 even though the share price is relatively unchanged.

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Renaissance Technologies LLC is a 3.37% holder while Eagle Asset Management owns 8.27%. EPS has consistently been growing over the last 10 years, averaging 10.53% annual growth over the last five years and cumulative growth of 11,900% since 2002.



YEAR
Diluted EPS
2002 0.01
2003 0.25
2004 1.51
2005 0.61
2006 0.72
2007 0.8
2008 0.71
2009 0.65
2010 0.98
2011 1.2
2012 1.19
5-Year Avg. YOY % Change 10.53683456


III) Balance Sheet and Profitability

· EPS has consistently been growing over the last 10 years, averaging 10.53% annual growth over the last five years and cumulative growth of 11,900% since 2002.

· Five-year average gross profit margin is 9.16% with the most recent fiscal year under the average at 8.1%.

· Retained earnings have grown from a $18.55 million deficit in 2003 to a surplus of $10.38 million in the most recent quarter.

· 2012 ROC was 42.6% and a five-year average ROC of 35.18%.

· WACC is under 8%.

In the latest quarter Wayside Technologies had just over $12 million in cash and marketable securities which represents $2.60 per share in cash. The dividend yield is 5.7% with a five-year average growth rate of 2% and a payout ratio of 54.5%. Inventory, consisting primarily of finished products held for resale, is stated at the lower of cost (weighted average) or market.

IV) Value and Price

TTM P/E of 9.80 could see expansion towards 12x to 14x while seeing annual growth of 10% suggesting Wayside Technology is 40% undervalued.

Using an EPS growth rate of 10.5% basic IV would be as follows.

IV = EPS x (8.5+10.5)

IV= 1.19 x 19

IV= $22.61

Using DCF valuation an IV band of $17 to $28 price per share is achieved by using $1.10 EPS growing annually at 5% to 10% discounted over 15 years at 10%.

Although the businesses margins have been compressing due to the competitive nature of the business and technology companies skipping the middleman going directly to the end consumer via e-commerce.

V) Business & Competitors

The business is of the commodity type, consisting of re-selling computer software from various publishers as well as systems and IT solutions. The competitors can be viewed, as the suppliers, should their attitude towards Wayside Technologies change. Also, competing software companies of the suppliers would be viewed as competition on a product-offering basis. Other direct competitors consist of SYNNEX Corporation, Tech Data Corp, CDW Corporation, Navarre Corporation and Ingram Micro Inc.

The two segments of the business are TechXtrend and Lifeboat Distribution with segmented quarterly results below. TechXtrend has had decreasing revenues while Lifeboat Distribution growth more than offsets the decline. To achieve higher efficiency TechXtrend could be spun off, sold or simply closed and customer accounts shifted.

VI) Management

[/b]The main officers and directors are listed below and more information can be found on the company website. Due to the size of the company most management is relatively unknown.

1. Simon F. Nynens: chairman, president and chief executive officer

2. Tom Flaherty: chief financial officer

3. Vito Legrottaglie: vice president of operations and information systems

4. Daniel T. Jamieson: vice president and general manager - Lifeboat Distribution

5. Richard J. Bevis: vice president marketing

6. Shawn J. Giordano: vice president of sales - Programmer's Paradise and TechXtend[b]

VII) Specific Risks
· Reliance on suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell.

· Having creditworthy customers to avoid a material impact on operating results.

· Industry competitive pricing pressures.

· A reliance on key management personnel.

· General economic conditions in the industry.

VIII) Catalysts

· Increased dividend distribution and share buybacks.

· M&A activity within the industry.

· General economic conditions improving.

· Lifeboat sales growth combined with possibility of closing or spinning off TechXtrend if declines continue.

Disclosure: This is not a recommendation to buy or sell anything. I have no position in any of the stocks mentioned but may initiate a position in the next 72 hours.

Any and all comments or questions welcome.

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


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