Friday, November 14, 1997
Insight Enterprises, Inc.
(Nasdaq: NSIT)
Phone: 602-902-1001
Website: http://www.insight.com
Price (11/13/97): $40
HOW DID IT DOUBLE?
With a little Insight, you could strike copper. Actually, this direct marketer
of computers has bought the rights to rename Tucson's Copper Bowl college
football game the Insight.com Bowl. Not exactly catchy, but it should raise
the profile of a company that has been delivering incisive earnings growth
thanks to strong operations and a focused sales force.
In the past year, other catalog computer vendors, most recently Micro
Warehouse (Nasdaq: MWHS), have seen their profits and stock prices buffeted.
Despite competitive pricing throughout the industry, Insight has bucked the
trend, managing to boost sales for FY97 (ended June 30) by 42% to $485.4
million while pushing net income up 72%. That was good for a 38% increase
in earnings per share to $0.99 even after a secondary offering last November.
Although gross profit fell from 14.2% to 13.1% of sales, operating expenses
declined from 11.4% to 9.8%. The company is getting some leverage from its
strong information systems and intense focus by its salespeople on more
profitable small business customers.
The stock took off in July following word of these FY97 earnings. It also
got a boost from the August 13 announcement of a now recently paid 3-for-2
stock split and buyback of 5% of the stock. The final stretch of this Double
followed the Oct. 20 report showing accelerating first quarter growth, with
sales up 67% and earnings per share rising 57%.
BUSINESS DESCRIPTION
Insight is a direct marketer of computers and related hardware and software,
offering some 40,000 products to business, education, government, and home
markets. It is focused on serving small- to medium-sized companies (100 to
1,000 employees), which now account for 90% of sales. About 4% of total sales
come through the company's website.
Taking advantage of its own real-time information systems, the company has
grown by adding well-trained sales associates to build relationships with
customers through outbound telemarketing.
As a result, two-thirds of sales come from repeat customers. That helps reduce
marketing expenses from less productive catalog mailings. The average order
size has also increased 31% to $983, since business customers buy pricier
items. Plus, the firm's just-in-time delivery system controls expenses and
explains why inventory turns consistently register a strong 21 per year.
Competitors include CDW Computer Centers (Nasdaq: CDWC), Global
Directmail (NYSE: GML), Micro Warehouse, and Multiple Zones (Nasdaq: MZON). Brothers Eric Crown (Chair/CEO) and Tim Crown (President) own 22%
of the company's stock.
FINANCIAL FACTS
Income Statement
12-month sales: $554.3 million
12-month income: $11.5 million
12-month EPS: $1.11
Profit Margin: 2.1%
Market Cap: $428 million
Balance Sheet
Cash: $3.5 million
Current Assets: $126.4 million
Current Liabilities: $45.7 million
Long-term Debt: N/A
Ratios
Price-to-earnings: 36
Price-to-sales: 0.77
HOW COULD YOU HAVE FOUND THIS DOUBLE?
At 30 times trailing earnings, Insight looked promising though fairly
valued when it was featured last December in Investor's Business Daily.
Promising but fairly valued companies are often worth watching. That's especially
true when an industry downdraft like the one that had already started hitting
mail-order PC vendors seemed likely to make the shares much cheaper down
the road.
By June, a slight pullback combined with growing earnings put Insight shares
at 20 times trailing earnings and about 15 times forward earnings estimates.
For a company with a solid record of delivering better than 30% earnings
growth in previous quarters, the stock should have seemed like a bargain,
even discounting the low margins of the basic business.
WHERE TO FROM HERE?
Insight's gross margins should continue to fall throughout FY98 due to pricing
pressures throughout the industry, as well as the company's sales mix. In
the first quarter, notebook computers jumped to 33% of sales with desktop
PCs and servers good for 11%, but sales of higher-margin hard drives have
declined significantly over the past year.
Insight has looked for additional ways to take advantage of its marketing
talents, offering turnkey direct marketing services to manufactures. In many
cases, Insight's sales representatives contact customers as agents of the
PC vendor. Such lower-margin outsourcing business made up 12% of sales in
the first quarter versus just 6% last quarter.
First quarter gross profits fell to 12.3% from 13.6% last year. Still, operating
expenses continued to decline, coming in at 8.8% of sales versus 10.6% a
year ago. So even as gross margins get squeezed, Insight is proving capable
of turning higher sales into more profitable sales.
This good news, though, hasn't been lost on investors. First Call shows that
consensus earnings estimates have risen to $1.37 a share (high $1.40) for
FY98 ending next June, while FY99 estimates are $1.76 a share (range $1.63
to $1.83). At best, that puts growth for the rest of this fiscal year at
36.3% for a PEG of 1.05.
Two analysts project long-term annual growth of 27%, though the high estimates
point to 33% growth over the next seven quarters. Using the high estimates,
we get a YPEG range of $38 to $46 and an aggressive YPEG on FY99 estimates
of $49 to $60.
Discounting for the risks associated with a low-margin business, Insight
looks fairly valued here unless you assume the company can keep delivering
earnings growth closer to 50% than 30%. Then again, the company's record
for turning copper into gold makes it worth watching.
-- Louis Corrigan
(TMFSeymor@aol.com)
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