April 2007 Archives

This past Thursday, 11th of April, CDW Corporation (CDWC) jumped up $3.54 from $61.94 to $65.48, a gain of 5.72%, after CDW announced its March sales results.

The opening part of the press release is positively glowing.

VERNON HILLS, Ill. - April 12, 2007 - CDW Corporation (NASDAQ: CDWC), a leading provider of technology products and services to business, government and education, today announced average daily sales for March 2007 were $31.644 million, an increase of 24.6 percent compared to average daily sales of $25.392 million for March 2006. Total sales for March 2007 were $696.2 million, an increase of 19.2 percent compared to total sales of $584.0 million for March 2006. There were 22 billing days in March 2007 and 23 billing days in March 2006.

But further down in the press release, the results do not seem nearly so glowing.

Total corporate sector segment sales in the first quarter of 2007 were $1.219 billion compared to $1.150 billion in the first quarter of 2006, representing an increase of 6.0 percent. First quarter of 2007 average daily sales for the corporate sector segment were $19.047 million compared to $17.972 million in the first quarter of 2006, representing an increase of 6.0 percent. Total public sector segment sales in the first quarter of 2007 were $497.4 million compared to $438.4 million in the first quarter of 2006, representing an increase of 13.4 percent. First quarter of 2007 average daily sales for the public sector segment were $7.772 million compared to $6.851 million in the first quarter of 2006, representing an increase of 13.4 percent.

Here we learn that during the first quarter, corporate sales only increased 6.0 percent, not the lofty 20 plus percent mentioned in the first paragraph. As the company properly noted, its March 2007 sales included sales from Berbee Information Networks Corporation and March 2006 sales did not include Berbee—an apples and oranges comparison. Given that the corporate sector sales increase are far behind those of the public sector, I am curious what that signals about the company's outlook for the remainder of the year. A 6.0 percent increase by itself is a healthy and respectable number. But did that increase in sales result from reduced margins?

Investors will learn more when the company releases its first quarter results on the 24th of April before the market opens and has its conference call later. I will be listening carefully to what the company says about its margins; Vista, Microsoft's new operating system; private versus public sector sales; and outlook for the remainder of the year.

Yahoo's chart for CDW's year-to-date stock price performance is available here

Disclosure: I am short CDW shares.

I just finished watching The Apprentice Season 6: Los Angeles twelfth episode. Wow!

The task for this week was for each of the three teams to create and present a market campaign for Trump International Hotel & Towers Las Vegas. At the beginning of the show, Trump had the remaining members all reside in the palace and align themselves into three teams.

The first team to present James and Stefani created a strong presentation, one that Trump himself liked immediately. Unless the other two teams both had strong presentations, James and Stefani were safe. As I watched James and Stefani prepare their presentation, I thought they worked well together and were focused.

The next team was Kristine and Nicole. Their presentation floundered throughout. The only redeeming feature of their presentation was their brochure, which Trump liked. That said, the brochure had the wrong phone number, an unforgivable mistake in Trump's mind. As I watched this pair assemble their presentation, I was impressed by Kristine. She was focused on the task and performed almost all the work. Unfortunately for her, she was responsible for the incorrect phone number. Nicole performed badly throughout the entire task. She did not bother to understand fully the task, did not ask pertinent questions, and slept throughout a majority of the work. While physically she might have been present, she was definitely absent mentally.

The last team was Frank and Heidi. Their presentation was even worse than the prior group's. Not only was their presentation worse, but so was their brochure. It was simply a terrible performance through and through. While I am not sure that Frank is a potential well rounded executive, I appreciate his contribution more and more each week. In this assignment, he took his task of creating the video and performed to the best of his ability. His partner Heidi, like Nicole, was missing in action. She was unfocused and unable to deliver her part of creating the narrative for the presentation as well as the brochure.

The original plan was to fire the worst team. But in this episode, there were two teams that vied for the last place. Trump decided, correctly, to fire the weakest link from the two worst teams. Frank and Heidi duked it out with Frank giving a spirited defense of his position and Heidi contradicting herself several times. I am surprised that it took Trump as long as it did to see that Heidi did not perform. Once Heidi had been fired, Trump then turned to Kristine and summarily fired her.

I believe that Kristine's firing was wrong. As unforgivable as having the incorrect phone number, not being mentally there and participating is even worse. A potential customer might try calling information or something else after having reached the wrong number. A customer should not have to do that. But based upon Nicole's work, a customer would not even be interested in calling. At least with Kristine's work, there was a hint of a presentation along with a brochure. As far as the audience could tell, Nicole contributed nothing of value to the end result. Or put differently, at least with Kristine's effort, there was a chance. With that said, I believe Trump made the wrong decision to fire Kristine.

Not only was Kristine the wrong person to fire for this specific task, but also she was one of the stronger remaining candidates. While she can be a bit condescending toward her teammates at times, she delivers.

The remaining candidates are Stefani, Nicole, Frank, and James. If I were to rank them now, I would say Nicole is the weakest and James is the strongest. Any one of the four, however, still has the ability and potential to walk away with the prize of being the Next Apprentice.

I have written previously about Mexico's Cantarell oil field. In yesterday's Wall Street Journal, David Luhnow wrote an excellent article DYING GIANT: Mexico Tries to Save A Big, Fading Oil Field (subscription required) about the decline of the Cantarell oil field and its importance to the Mexican economy. Moreover, Luhnow indicated that Cantarell might be typical of many of the elephant fields.

As an aside, you can find earlier references on my blog to Cantarell oil field by hitting the Cantarell tag below this article. For those reading by RSS, you will need to visit my blog.

It's widely believed that the world's biggest oil fields have already been found. In the decades leading up to the 1970s, the world discovered eight big fields that produced between 500,000 to one million barrels a day, according to Matthew Simmons, a veteran oil industry banker. During the 1970s and 1980s, only two were found. Since then, only one -- the Kashagan field in Kazakhstan -- has the potential to easily top the 500,000 barrel-a-day mark.

Two decades ago, about a dozen fields produced more than a million barrels a day. Now there are only four, one of which is Cantarell. The future of two others, discovered more than 50 years ago, remains in question. Some analysts speculate Saudi Arabia's Ghawar, the biggest field by far, could begin a gradual decline within a decade or so. Another, Kuwait's Burgan, is showing signs of maturity. In November of 2005, Kuwait Oil Co. lowered its estimate of the field's sustainable production level to 1.7 million barrels a day from 1.9 million a day.

Replacing big gushers is difficult. Industrialized countries, which tapped out their big fields years earlier, haven't been able to maintain output despite finding large numbers of smaller fields and investing heavily in technology. Alaska production, hurt by declines at the giant Prudhoe Bay field, dropped from 2 million barrels a day in 1988 to a current rate of about 900,000 a day.

As those who read my blog, you know that I am bullish on commodities in general and in particular on gold and silver as well as oil and gas. If the bulls on energy are correct, then this article serves an excellent warning of higher prices to come.

Furthermore, I am curious as to how Mexico grapples with the decline of Cantarell. Will it open its oil industry to foreigners? Or will it make cutbacks in other areas of its economy to compensate for decline in production? Mexico faces some difficult decisions.

I highly recommend reading and keeping the WSJ article. It provides an excellent snapshot of the difficulties facing the oil companies as they search for new reserves. And it highlights the political challenges of those countries with large fields in decline.

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.

On 30 March 2007, Jim Rogers provided an interesting and wide ranging interview on Bloomberg. The video interview lasts for about 15 minutes and covers China, Vietnam, Japan, U.S., and commodities. I am a huge Jim Rogers fan, so I always enjoy reading and listening to his comments.