Analysts' Choice: CDW's Breadth Of Fresh Air

9/28/2015


  Recent Price
$40
  Dividend
$0.27
  Yield
0.7%
  P/E Ratio
16
  Shares (millions)
173
  Long-Term Debt As % Of Capital
76%
  52-Week Price Range
$41.99 - $27.59

The fate of some companies twists on the whims of one key customer or the success of a single product. Not so for CDW ($40; CDW), which sells more than 100,000 products and services to 250,000 customers in the U.S. (96% of 2014 sales) and Canada (4%).

CDW claims to hold a leading 6% slice of its $215 billion addressable U.S. technology market. The company's sales have grown at more than twice the rate of U.S. technology spending over the past six years. More importantly, CDW seems capable of continuing to outpace peers, with management projecting 5% to 7% higher organic sales this year, versus 3% to 4% growth for overall tech spending. CDW, earning a Quadrix Overall rank of 93, is a Focus List Buy and a Long-Term Buy.

Business breakdown

CDW's customers are primarily midsized businesses (46%), schools (15%), hospitals and long-term care facilities (13%), and government agencies (12%). A decade ago, CDW's principal products included printers, computers, and software. The rise of cloud computing adds some risk to its traditional product portfolio. However, CDW has adapted to tech trends by offering integrated services that help clients manage security, data centers, and cloud-based needs.

With that in mind, in August CDW acquired the remaining 65% stake in Kelway, a U.K.-based provider of integrated technology services. CDW paid $431 million in cash and stock and assumed $80 million in debt. The U.K. accounts for about 90% of Kelway's annual revenue of roughly $850 million. The deal should boost CDW's sales five to six percentage points in the second half of 2015 and increase per-share earnings $0.06 to $0.08.

CDW's sales rose 7% in the June quarter to mark the 20th straight quarter of growth. Recent growth has been driven by services and hardware such as notebook computers and mobile devices, which have more than offset continued weakness in desktop PCs. Cash from operations turned negative last quarter due to elevated tax payments but rose 7% to $358 million in the 12 months ended June.

Conclusion

Over the past three months, CDW generated a 9% total return, outperforming more than 94% of the technology stocks in the S&P 1500 Index. That rally pushed its Value score down to 57, though the stock still looks attractive based on two key measures.

At 16 times trailing earnings, the shares remain 12% below the median for technology stocks. CDW also trades at 0.6 times trailing sales to rank in the top 20% of our research universe for one of Quadrix's most effective factors.

CDW's exposure to the U.S. federal government (7%) presents some risk if spending gets pressured by politicians seeking austerity measures this fall. But robust overall growth prospects seem to support CDW's valuation. Per-share profits are projected to jump 17% in the 12 months ending June 2016, well above the sector median of 5%. Encouragingly, analyst estimates have risen since CDW's latest quarterly report.

An annual report for CDW Corp. is available 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
Jun '15
0.81
vs.
0.67
7%
39.32
-
34.19
16 - 14
Mar '15
0.56
vs.
0.47
4%
38.44
-
33.21
16 - 14
Dec '14
0.56
vs.
0.54
12%
36.08
-
27.59
16 - 12
Sep '14
0.64
vs.
0.50
14%
33.80
-
30.07
16 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
12.07
2.37
0.20
36.08
-
68.33
15 - 10
2013
10.77
1.83
0.04
24.51
-
55.01
13 - 9
2012
10.13
NA
0.00
NA
-
NA
NA
2011
9.60
NA
0.00
NA
-
NA
NA
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
81
57
88
28
97
95

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


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