Tech Broker CDW Has Room To Grow

3/30/2015


  Recent Price
$37
  Dividend
$0.27
  Yield
0.7%
  P/E Ratio
16
  Shares (millions)
173
  Long-Term Debt as % of Capital
77%
  52-Week Price Range
$38.44 - $25.05

The idea for what became CDW ($37; CDW) was hatched in 1982, when founder Michael Krasny, an unemployed college graduate, tried to sell his personal computer through the classified ads of a local newspaper. The ad generated enough interest for Krasny to make a tidy profit on his PC. That initial success emboldened Krasny to begin buying and selling computer equipment as a broker.

Today, CDW holds an estimated 5% share of the highly fragmented U.S. and Canadian market for indirect sales of technology products. It supplies hardware and software products to more than 250,000 customers, including small and midsized companies (54% of total sales), educational institutions (15%), health-care facilities (13%), and government agencies (12%). Last year, CDW generated more than $12 billion in revenue. Already a Long-Term Buy, CDW is being added to the Buy List.

Business breakdown

Weakness in the personal-computer market is a concern, as notebooks and mobile devices represent nearly 20% of sales. But CDW reported that sales of desktop PCs, notebooks, and mobile devices grew faster than the company's overall revenue growth last year. Per-share profits are projected to rise 14% in 2015. The U.S. accounts for 96% of sales, limiting the company's exposure to the strengthening U.S. dollar.

Shares are up 6% this year and linger near an all-time high for CDW, which went public in June 2013. Yet the shares trade at just 14 times estimated earnings, a 26% discount to the median technology stock in the S&P 1500 Index. The stock's price/sales ratio — among the most effective factors in Quadrix over the past decade — is just 0.5, ranking in the top 15% of our research universe.

Strong cash trends

Operating cash flow has grown at least 15% in each of the past two years. The company has aggressively paid off debt and in 2013 initiated a quarterly dividend. Since the end of 2012, net debt has fallen 24% to $2.85 billion, bringing the balance sheet close to management's preferred leverage range. That should free up more capital for dividend growth and stock buybacks.

Management seeks to raise its dividend payout ratio to 30% of free cash flow over the next five years. The dividend, hiked 59% to $0.0675 per share in the December quarter, represented about 10% of free cash flow in 2014.

CDW projects 2015 free cash flow near the upper end of its previously targeted range of 2.5% to 3.0% of revenue. The consensus expects sales to grow 7% to $12.87 billion this year, which would imply free cash flow of $322 million to $386 million, or $1.86 to $2.23 per share.

Conclusion

A 30% return of projected 2015 cash flow would more than double the dividend, while a 15% return implies at least 40% growth. We see upside potential to these dividend-growth estimates, considering CDW is approved to repurchase $500 million of stock, nearly 8% of its share count.

An annual report for CDW Corp. can be obtained at 200 N. Milwaukee Ave., Vernon Hills, IL 60061; (847) 465-6000; www.cdw.com.

CDW
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '14
0.59
vs.
0.54
12%
36.08
-
27.59
16 - 12
Sep '14
0.64
vs.
0.50
14%
33.80
-
30.07
16 - 14
Jun '14
0.67
vs.
0.46
12%
32.41
-
26.70
16 - 14
Mar '14
0.47
vs.
0.33
10%
27.53
-
22.72
15 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
12.07
2.37
0.20
36.08
-
22.72
15 - 10
2013
10.77
1.83
0.04
24.51
-
17.38
13 - 9
2012
10.13
NM
0.00
NM
-
NM
NM
2011
9.60
NM
0.00
NM
-
NM
NM
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
92
72
91
26
84
84

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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