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Bear Of The Day: PC Connection (CNXN)

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PC Connection (CNXN - Free Report) is a Zacks Rank #5(Strong Sell) stock that posted a big miss in early August and the stock sank as a result.  Since that time estimates have been trimmed and the stock has fallen as well.  Let’s take a deeper look in this Bear Of The Day article.

Description

PC Connection, Inc. is a direct marketer of brand-name personal computers and related peripherals, software, and networking products to business, education, government, and consumer end users located primarily in the United States.

Earnings History

The most recent quarter caused the stock to tumble.  I see the company reporting EPS of $0.32 when $0.68 was expected.  That $0.36 difference translates into a negative earnings surprise of 53%.  That has a way of sending expectations and the stock price lower.

Prior to the most recent beat, the company posted 3 beats of the Zacks Consensus Estimate.  The average positive earnings surprise over the last four quarters is 3.4%, so there one other big beat and two smaller ones.

Earnings Estimate Revisions

The key to the Zacks Rank is the movement in earnings estimates.  When you see negative estimate revisions you will see the Zacks Rank move lower and the stock will generally do the same thing.

I see estimates moving lower across the board for CNXN.

There is a 12 cent decrease over the last 90 days for the current quarter.

There is another 12  decrease over the same time period for next quarter.

The full year 2020 saw a move from $2.97 to $2.23 and 2021 slumped from $3.10 to $2.66.

Those sorts of moves will push a stock to a Zacks Rank #5 (Strong Sell)

Valuation

The topline is contracting by 25% and growth investors hate to see that.  At the same time the valuation is somewhat reasonable, with a 19x forward earnings multiple and a 1.8x price to book multiple.  That said, operating margins a falling and need to turn around before investors are willing to make a connection with this stock.

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