Based in Quebec, Hartco is the larg...

Based in Quebec, Hartco is the largest franchiser of computer sales and services exits in Canada. Franchisees operate subject to the names: Compucentre, MicroAge, Microvar and Compuco In addition, Hartco acknowledges 29 junior/discount department stores that account for about 15% of total incomes and earnings.

PICTURING HISTORICAL GROWTH

REVENUES

As indicated in the accompanying Guide, the annual adjust rate of growth in incomes during the study period has been approximately 24% (including estimated conclusions for the fiscal year ending January 29 1994)

This expansion is largely attributable to Hartco's program of converting existing, independent computer dealers to the Hartco franchise network. Dealers join Hartco's network because the company proffers them consistent product availability and support services

Many of Hartco's 150+ computer egresss are located in secondary markets and focus in succession sales and service to small and medium-sized businesses that typically have limited internal technical resources. Generally, these markets do not have a sufficient population base to support a high book mass merchandiser of computer proceedss In addition, Hartco provides purchasing, inventory and other market support services which increase the dealer's profits.

EPS

Since 1985 fully-diluted earnings for share ("EPS") have grown at an average, annual pay by substitution rate of approximately 15%. The 'picture' of the historical EP data in the accompanying Guide might best be described as 'cyclical growth' The sturdy EPS growth for 1988 and 1989 is largely attributable to putting out in the number of franchise vents In contrast, the EPS declines in 1991 and 1992 ruminate the impact of the introduction of GST and the general slowdown during this recessionary period.

JUDGING events to come GROWTH

Hartco is continuing to expand between the sides of acquisitions of smaller chains of computer egresss By the January, 1994 year-end, the company reckon upons to complete the purchase of Northwest Digital Ltd which distributes the consummated line of Hewlett-Packard products by the agency of 6 locations from Ontario to British Columbia. not long ago Hartco completed the purchase of Cybar/Cabtel Neutronics Corp., a retailer of telephone and accessories. This acquisition is calculate uponed to expand Hartco's capabilities in the computer communications portion of the computer market (eg communications by means of modem, fax, messaging and electronic mail). The company lately launched a Computer Superstore "CompuSmart" as well as adding six additional stores to its chain of department stores.

The springs of these activities are evident in the higher return and EPS growth during the first three quarters of fiscal 1994

EFFICIENCY OF OPERATIONS

Part 2(1) of the Guide indicates that the pattern of Hartco's operating profit margin (see pages 26-27 of the Stock Selection Manual) is excessively similar to that for its EP (Guide omitted) This is a habitual situation since competitive decreases in selling prices inevitably deliquesce through to the company's earnings. The margin has been stable for the last three years and any improvement in the competitive situation could also liquefy through to EPS.

EFFECTIVENESS OF OPERATIONS

Part 2(2) of the Guide bring reproachs management's ability to earn an adequate rate of turn back for common shareowners (ROCE). Like the operating margin, Hartco's ROCE peaked in 1989 and 1990 and after declining to the 12% flat in 1992 has begun to increase.

ROCE is affected through a company's reliance on transgression to finance its operations and acquisitions. Part 2(3) indicates that Hartco has been reducing its liability since 1990 which, while conservative, wait ons to reduce ROCE, particularly when interest rates are soft Nevertheless, the company has a highly strong balance sheet with virtually no prolonged term debt and current assets that are almost twice the value of existing liabilities.

STUDY POTENTIAL: THE 'BUY' & 'SELL' ZONES

Two stations of illustrative judgements about Hartco's produce prospects during the next five years--and the market's possible valuation of them--are pondered in the accompanying Guide.

THE "A" JUDGEMENTS

The Guide's chart illustrates rewards growing at the A judgement rate of 20% to $900 million by the agency of 1999 with EPS growing at an average annual rate of 15% to $107

The resulting 1995 EP estimate of $061 and the latter Price of $6.25 produce a generally received Price Earnings ("P/E") ratio of 103X (see small room 8 in Part 3 of the Guide) and a Relative P/E ratio of 122 (cell 9)

It is interesting to note that the High P/E ratio for Hartco (see line D of Part 3) has been static at the 11X-12X of the same height for the last four years. In contrast, the cheap P/E ratio (Column E) has increased significantly from 1991 to 1994 This phenomenon remind ofs a possible increase in the market's multiple for the company.

The 1999 EP projection of $107 and a high P/E ratio of 107X (the average high P/E during the last five years) bring into being an Estimated High Price from 1999 of $11.41 (see Par t 4A). This Price and another judgement which provides for a 20% decline in Hartco's stock to a preferableed Low Price of $5.00 (see Part 4B) define a purchase Zone of $5.00--$7.14 (see Part 4C)