PC Connection (NASDAQ:CNXN): A Hidden Gem in Tech Distribution, Ready for Lift-Off Through Strategic Value Creation

PC Connection (NASDAQ:CNXN), a leading distributor of IT and networking solutions, has long been overshadowed by peers in the tech supply chain sector. While its 6.2% compound annual growth rate (CAGR) in earnings lags behind industry rivals like Avnet (AVT) and Insight Enterprises (NSIT), the company’s robust balance sheet and underutilized capital return strategies position it as a compelling opportunity for investors seeking both income and growth. With $170 million in share repurchase capacity, a fortress-like cash position, and minimal debt, CNXN is primed to bridge its valuation gap through strategic moves—making it a rare “income-growth hybrid” play in today’s volatile markets.

The Undervalued Growth Engine: Why CNXN’s Earnings Gap is a Buying Opportunity

CNXN’s earnings growth of 6.2% CAGR trails peers like Avnet (23.11% five-year EPS growth) and Insight (8.4% CAGR). However, this gap is not a reflection of operational weakness but rather a pricing anomaly. Let’s break down the numbers:

• Peer Performance:
• Avnet (AVT): 23.11% EPS growth over five years, with a forward P/E of 13.2x.
• Insight (NSIT): 8.4% CAGR in EPS from 2019–2024, trading at 22.2x P/E.
• CNXN: 6.2% CAGR in earnings, yet trading at a discount to its industry average (19.1x vs. 22.1x for the broader sector).

The market’s myopic focus on short-term growth metrics overlooks CNXN’s structural advantages. Its first-quarter 2025 results—10.9% YoY sales growth, 20% EPS expansion—hint at untapped potential. With a $170M buyback authorization and minimal debt (<1x net debt to EBITDA), management has the flexibility to accelerate shareholder returns.

Unlocking Value Through Balance Sheet Optimization

CNXN’s financial health is its secret weapon:

1. Cash Reserves:
2. $122 million in cash and equivalents (Q1 2025) vs. peers like ScanSource (SCSC), which trades at 13.1x P/E but lacks similar liquidity buffers.

3. A cash-to-debt ratio of 5.1x, signaling resilience in downturns.

4. Share Repurchase Potential:

5. The recent $50M boost to its buyback program is a start, but CNXN’s cash flow ($127M gross profit in Q1 alone) supports much larger repurchases.
6. A $100M annual buyback could reduce shares by ~5%, directly boosting EPS.

1. Dividend Strategy: The Missing Catalyst
2. CNXN currently offers a paltry 0.8% dividend yield, far below peers like Avnet (1.2%) and ePlus (EPST).
3. With free cash flow of ~$50M annually (based on Q1 trends), CNXN could easily double its dividend to 1.6%, attracting income investors.

The Case for Aggressive Capital Returns

The math is clear: CNXN’s underappreciated balance sheet can drive a valuation re-rating. Consider these scenarios:
- Dividend Increase: A 20% annual dividend hike over three years (to 2.5% yield) would attract yield-seeking investors, lifting shares to peer P/E multiples.
- Special Payout: A one-time $0.50 per share dividend (using existing cash) could provide an instant 8% pop in share price.
- Accelerated Buybacks: Deploying $100M annually to repurchase shares at current prices would shrink the equity base, amplifying EPS growth by ~3% annually.

Why Now? The Perfect Storm for CNXN

• Undervalued vs. Peers: CNXN trades at a 34% discount to Insight (NSIT) and a 31% discount to the industry average, despite similar growth profiles.
• Management’s Track Record: The team has proven adept at navigating tech cycles, evidenced by its 10.9% sales growth in Q1 2025 amid sector-wide declines.
• Market Mispricing: Investors have yet to factor in CNXN’s balance sheet strength, creating a rare misalignment between fundamentals and valuation.

Risks & Considerations

• Tech Sector Volatility: Demand for IT hardware could weaken further, though CNXN’s focus on networking and cybersecurity solutions offers resilience.
• Peer Outperformance: If Avnet or Insight deliver outsized growth, CNXN’s relative undervaluation could narrow without catalysts.

Conclusion: Act Now Before the Market Catches On

PC Connection is a rare gem in the tech distribution sector: a company with a fortress balance sheet, untapped capital return potential, and a valuation that ignores its strengths. With peers trading at higher multiples despite weaker financial metrics, CNXN is poised for a re-rating once management embraces aggressive dividend hikes or buybacks.

For income-oriented growth investors, CNXN offers a unique blend of low risk (cash-rich, low debt) and high reward potential. The time to act is now—before the market recognizes what’s already in hand.

Investment Thesis: Buy CNXN for a 20%+ upside within 12 months via valuation convergence and capital return initiatives. Set a price target of $30/share (22x 2025E EPS of $1.36), aligning with sector averages.