by Tom Farre

Given the current merger mania, it's crucial that VARs know how to value their companies. One indicator is Wall Street, which we track with the VB500, our own list of 10 publicly traded resellers. Not quite a random walk down the VARBusiness 500, the VB500 stocks represent the breadth and depth of the value-added channel, from giant integrators such as EDS, through mid-cap VARs such as Computer Horizons Corp. and HBO & Co., down to TransNet Corp., a small cap dealer and integrator.

If you have money in stocks, you probably remember the swan dive the market took in July 1996, when we left off looking at these companies. Today, with high-tech stocks rallying, you might expect excellent performance from the VB500. Indeed, the VB500 stocks returned an average of 22 percent during the past year-my 401(k) should be doing so well!

But compared with other indices, 22 percent looks puny. In the same time frame, the Dow and the NASDAQ Composite moved up roughly 50 percent. And led by big moves from Intel and Microsoft recently, the NASDAQ Computer Index rose a sweet 88 percent over the past year. So why only 22 percent from the VB500?

Given the diversity of the list, there's no single answer. Business was good overall, with revenue and profits generally rising. But "1997 is more of a stock picker's market," says Neal Johnson, assistant vice president at Robinson-Humphrey Co. in Atlanta, and some of the big names on our list such as EDS and Vanstar ran into trouble last year. "Corporate sales seemed to slow down in the second half of 1996," Johnson says, continuing into this year, and that hurt Vanstar. EDS ran into an earnings land mine, disappointing for the first time. Both stocks have started to come back as conditions improve.

As it did last year, Fortune 500 integrator Computer Horizons turned in the top performance, up 187 percent. At the bottom for two years running was TransNet, down 27 percent, hurt by operating profit of only 1.6 percent.

Why is Wall Street so high on Computer Horizons, awarding it a price to earnings ratio (PE) of 67? Recent quarterly results show revenue up 35 percent and net income more than doubling, mainly due to growing margins in the Year 2000 Solutions business. Clearly, Year 2000 is hot, and Computer Horizons is one of the few companies with solid accomplishments.

Even Year 2000 can be a slippery slope, as EDS found out. EDS expects to generate more than $1 billion in Year 2000 compliance contracts, and that's good. But EDS has big Year 2000 liabilities in its own systems-$100 million worth, maybe more-muddying the waters for EDS as a Year 2000 play. Still, looking at Computer Horizons at 67 times earnings and EDS at 20, which is more fairly valued? With the VB500 at a median PE of 17.5, I believe investors are underrating the earnings quality. Valuations for resellers should rise as analysts begin to better understand the channel's value-add.

.END