Report: CDW, Direct-Market Distributors Running on Strong Margins

Direct-market IT distributors such as CDW, Insight and PC Connection are outpacing their peers on the Nasdaq and S&P boards on strong margins and acquisitions, says a report by Raymond James and Associates.

The distributors beat their market averages in growth during the third quarter but face challenges and slower growth in the next three months, Raymond James said of the group.

Resource Library:

An earlier report by Raymond James released in September said two-tier distributors also fared well in the quarter, increasing revenue 6 percent despite a slowdown in SMB (small and midsize business) spending, a sign that more businesses were seeking VARs for their IT needs.

Much of the strength of direct-market distributors was based on strong margins, which rose nearly 20 percent to 15.8 percent at CDW, less dramatically at the others.

Market leader CDW saw its price per share rise 19 percent to $65.67, and Insight Enterprise, 14 percent to $21.62, based on strong margins and acquisitions each company picked up in the quarter.

CDW announced its intent Sept. 18 to purchase Berbee Information Networks, a Midwest solution provider, and Insight acquired Software Spectrum, a business software and mobility services reseller, from Level 3 Communications.

SMB distributors fared even better due to high demand in the SMB and normal pricing pressure, the report stated.

PC Connection's price per share rose 105 percent to $11.92, Zones 100 percent to $13.27, Systemax 123 percent to $18.63 and PC Mall 18 percent to $7.48.

The SMB distributors also avoided a potential price war expected from Dell that would have weakened margins at those firms, which derive on average 20 percent of revenue from PC sales, wrote Brian G. Alexander and Bob Gruendyke, analysts at Raymond James, in a research note on the subject. Dell's overall poor performance in the same period pushed the PC manufacturer away from that measure, said the note from Alexander and Gruendyke.