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With the IT industry typically being a rather high-margin industry, the wafer-thin operating margin of 4% gives the real scale of the "commodity" type of business that Computacenter undertakes. The company does comment, however, that the increasing economies of scale will be a "significant source of competitive advantage". Or, in other words, being the lowest cost provider of services should help them win the day. When considering a long-term investment, a company should be relying on something other than price. But then again, Computacenter has a very distinguished record of operating at the bottom of the IT food chain.
In the early days, Computacenter was primarily a reseller of computers, securing contracts to supply, install and maintain swathes of corporate desktops. And today, it still relies heavily on that sort of business, being a major beneficiary of constant PC and software upgrades. A few releases of Windows software, usually requiring a new specification of PC, has meant lots business heading towards Computacenter's direction over the last few year.
But the ability to resell and look after a computer has fast become seen as a rather commodity type of skill. So, Computacenter has made big strides to "add value" to its services of late. Last year, Computacenter entered an arrangement with Gateway (NYSE: GTW) combine the PC manufacturer's build-to-order skills with its own servicing talents. Not content with signing up big PC names, Computacenter has also introduced a business-to-business (B2B) e-procurement system, "On Trac", to increase service levels and reduce costs. Just to give shareholders a taste of the exciting stock market valuations of B2B companies, Computacenter announced last month it was to explore the possibility of spinning off its e-commerce venture.
As you would expect, a business such as Computacenter suffered from the Y2K "freeze". After replacing their old pieces of kit for those that were Millennium compliant, some of the orders dried up in the second half of 1999. So, when announcing full year results for 1999, it was no surprise the numbers looked quite tame quite tame for your typical IT fast-grower, earnings rising only 11%.
Here are the bare figures from today's announcement.
1999 1998
Turnover (£m) 1,760 1,586
Operating profit (£m) 76 66
Earnings per share (p) 30.6 27.0
Dividend per share (p) 2.9 2.5
Margins and pricing aside, it seems the company is back on track to resume substantial future revenue growth. Computacenter suggest that the "huge anticipated growth of B2B e-commerce systems and the arrival of Microsoft's (Nasdaq: MSFT) Windows 2000 operating system will serve as significant growth drivers over the coming year". Surprisingly, given that Computacenter's business mainly revolves around the reselling of PCs, the decline in general IT hardware prices shouldn't be a problem. The savings made will fuel demand for other higher margin Computacenter services. Well, that's what the company says anyway.
Whenever you look at any high flyer in the IT sector, you always come across the usual stumbling block -- a very high price. At 1415p, the shares trade on a rather demanding multiple of 46 times the earnings announced today. With only 6% earnings growth forecast this year, rising to a 20% growth in 2001, a fair bit of Computacenter's future is factored into today's price. With hindsight, the time to have bought Computacenter was when investors were fretting over Y2K last year, and frantically selling the stock down to under 400p. Buying a long-term growth company undergoing a temporary blip can make for a great investment. But buying a long-term growth company, with the stock market expecting a very rosy future, requires a lot of belief in the company's future.
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