PC Connection (CNXN) stock is in focus after the company reported a new NASA Solutions for Enterprise-Wide Procurement VI contract through its GovConnection subsidiary, expanding access to federal IT purchasing programs.

PC Connection shares have reacted positively in the very short term, with a 1 day share price return of 3.48% and a 90 day share price return of 18.48%. The 1 year total shareholder return of 26.73% points to momentum that has been building rather than fading.

Scan other federal IT contractors riding similar contract momentum by reviewing the hand picked list of solid balance sheet and fundamentals (51 results).

The NASA SEWP VI news has given PC Connection fresh momentum, yet the stock still trades below the average analyst target and at a steep discount to one intrinsic value estimate. Is the recent move closing that gap or barely touching it?

Price-to-Earnings of 20.9x: Is it justified?

On a P/E of 20.9x, PC Connection trades at a lower earnings multiple than the broader US Electronic industry average of 31x and below a peer average of 23.5x. That puts the stock on a discount against both its immediate peer set and the wider industry, even after the recent contract news and share price move.

The P/E ratio compares PC Connection's share price of $79.38 to its earnings per share and is a common yardstick for how the market is pricing current earnings power. For an IT solutions provider that reports $2.99b of revenue and $95.84m of net income, the P/E helps investors frame how much they are paying for each dollar of profit across its enterprise, business, and public sector segments.

Relative to the industry, the current 20.9x P/E suggests the market is pricing PC Connection's earnings at a lower level than many Electronic peers, despite earnings growth of 11.4% in the past year and a 5 year earnings growth rate of 4.3% per year. However, compared with an estimated fair P/E of 20.6x, the stock screens as slightly expensive on this metric, which indicates limited room for the multiple to stretch further if it moves toward that fair ratio.

Against this backdrop, the contrast between a P/E below industry averages and a P/E slightly above the estimated fair level gives investors a clear reference point for how the market currently values PC Connection's earnings power relative to both peers and the model driven fair ratio. Explore the SWS fair ratio for PC Connection

Result: Price-to-Earnings of 20.9x (ABOUT RIGHT)

However, PC Connection still faces risks related to federal contract concentration and potential volatility if its recent revenue growth of 3.9% or net income growth of 10.8% slows.

Another View on PC Connection’s Valuation

The earlier P/E work suggests PC Connection looks roughly fairly priced on current earnings, yet the SWS DCF model points in a very different direction. On that measure, CNXN at $79.38 trades well below an estimated future cash flow value of $415.51, which indicates a large gap relative to the model.

That kind of difference can reflect conservative market expectations for growth, or it can reflect optimistic assumptions built into the cash flow model. The key question for you is which side appears more realistic for PC Connection over time: the earnings multiple or the cash flow view.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out PC Connection for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 49 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

The mix of contract news, valuation signals, and sentiment around PC Connection gives you a lot to weigh, so move quickly and review the data that matters most to you. To see the balance of concerns and potential upside in one place, take a closer look at the 3 key rewards and 1 important warning sign.

Looking For More Ideas Beyond PC Connection?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.