Some stocks fly so low under the radar that they may not be spotted for years. Climb Global Solutions (NASDAQ:CLMB) falls squarely into that category. The odds are high that this is the first time most readers have even heard of the company, and yet it’s very much worth a closer look.
What Does Climb Global Solutions Do?
Let’s begin by explaining what CLMB actually does. Climb is an information technology distributor, helping tech vendors to access value added resellers (VARs), Managed Service Providers (MSPs) and Content Protection Systems (CSPs).
In plain english that means Climb is a middleman in the tech world, bridging the gap between product makers and sellers.
You can think of Climb Global as solving problems related to Cloud, Connectivity, Data Management and Security via its two divisions, Solutions and Distribution.
The company will distribute to VARs both software and hardware, and offers tools for virtualization, cloud computing, and networking among others in its suite.
With a presence in the US, Europe and UK, Climb is truly an international firm, and as you’ll see is growing rapidly.
Why Climb Global Deserves Your Attention
Over the past four quarters, revenue growth has been on the rise, quickly. Year-over-year revenue growth at Climb sprinted higher last year from 10.7% in Q3 2022 to 17.7% in Q4 2022 and this year from 19.2% in Q1 2023 to 20.4% in Q1 2023.
While the top line growth alone is impressive, it doesn’t tell the full financial story. When we look to the operating income at Climb Global Solutions, it’s nothing short of remarkable. For twelve quarters straight operating income has been in the black.
That in turn has translated to a healthy cash pile of $43.9 million and just $3.1 million of long-term debt. The company also has $130 million in accounts receivable, which is quite astonishing given that the entire market capitalization of the firm is hovering around $200 million.
But the good news train doesn’t stop there. The further you dig under the hood, the more there is to like at Climb Global. For example, the company pays a generous dividend of 1.54%, which admittedly is somewhat surprising for a firm growing so fast, though it must be emphasized that this business has been around since 1982.
Another factor that makes the company an attractive prospect is its high return on invested capital, which sits at 20.4%, handily beating its peer average of 17.9%, and well above the 3.0% sector average.
Still, there are more nuggets for investors to discover on the financial statements.
Strong Cash Flows
In the first quarter this year, Climb Global reported strong, positive free cash flows of $42.3 million. Yes, they went negative in the most recent quarter but so too did the company just make an acquisition of Data Solutions Holdings.
We don’t see anything of great concern higher up on the cash flow statement either, like overly generous stock-based compensation, which is a typical culprit for higher growth firms as they aim to attract talent, and often overpay for it.
So, with the income statement, balance sheet, and cash flow statement all looking quite pristine, how does the valuation rank?
Is the word out on Wall Street that Climb Global is worth closer scrutiny? It doesn’t seem so.
Is Climb Global Stock Undervalued?
The one analyst covering Climb Global Solutions stock has a $48 price target on it, implying it is 8.5% undervalued.
Our own analysis usually leans more pessimistic than Wall Street analysts but, in this case, it bucks the trend because a discounted cash flow forecast puts fair value for Climb Global stock 38.9% higher at $61 per share.
With revenue growth accelerating, a high return on invested capital suggestive of a wide economic moat, a cash-rich and low-debt balance sheet, and a valuation that infers a strong cash flow yield, Climb Global stock appears to have many of the ingredients needed to rise substantially higher over time.
Even CLMB’s price-to-earnings ratio at this time is quite attractive, sitting at just 17.1x, though it must be highlighted that the PEG of 8.97 should be viewed as a flag that earnings growth is not as impressive as it could be.
Climb Global Solutions is a relatively small company that could be labeled a micro-cap based on its market capitalization near $200 million but it’s a heavyweight when it comes to financial stability and predictability.
Having accelerated revenue growth in the past year and demonstrated EBIT in the black for the past 3 years, management has clearly executed well and appears to have shareholders best interests in mind with low stock based compensation and a modest dividend yield.
A valuation analysis reveals considerable upside potential for Climb Global which is supported by a reasonable PE ratio.
This IT distributor and solutions provider has remained under the radar and not yet caught the attention of Wall Street but we suspect when it does the share price could have some pep to its step.
At the very least, it deserves a spot on any eagle-eyed investor’s watchlist for what’s up-and-coming and could deliver impressive returns for the foreseeable future. That’s in no small part a result of its high return on invested capital that suggests the company has sustained a competitive advantage over its peers, and is unlikely to loosen its grip anytime soon.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.