Analysts' Choice: CDW Not Just A Distributor

8/1/2016


  Recent Price
$43
  Dividend
$0.43
  Yield
1.0%
  P/E Ratio
14
  Shares (millions)
169
  Long-Term Debt As % Of Capital
76%
  52-Week Price Range
$46.92 - $30.40

CDW ($43; CDW) distributes a broad portfolio of products including notebooks and mobile devices (20% of 2015 sales), software (17%), communications products (15%), data storage (8%), and other types of hardware (37%), such as printers and video monitors. The company also serves as an extension of its clients' IT department. CDW employs a staff of engineers and technicians who help clients carry out infrastructure upgrades; services accounted for 4% of revenue last year, up from 3% the year before.

CDW is delivering excellent operating momentum. For the 12 months ended March, earnings per share from operations climbed 17% on 10% higher sales, while operating cash flow rose 44% and free cash flow 38%. Fewer than 5% of S&P 500 Index companies have grown all four metrics by double-digits in the past year. Better yet, CDW seems capable of continuing to outgrow the broad market. The stock is a Buy and a Long-Term Buy.

Nearly 60% of technology revenue in the U.S. comes from indirect channels, rather than straight from manufacturers and software publishers. CDW, the largest publicly traded supplier of technology products, takes a 5% slice of the $282 billion market for small-business technology in the U.S., Canada, and the U.K. More importantly, CDW is gaining share in the fragmented market.

About 45% of CDW's sales come from businesses with 100 to 5,000 employees. Government agencies, schools, and health-care facilities each account for 12% to 14% of sales. CDW derives the remainder of its sales from smaller businesses, engineering services, and operations in Canada and the U.K. The U.S. accounts for more than 90% of CDW's revenue.

The emergence of cloud computing has upended some pockets of the technology sector. The cloud could reduce the need for resellers such as CDW if companies market their software or infrastructure directly to businesses. But CDW sees an opportunity in the upheaval, noting that small and midsized companies tend to lack the internal resources to select, procure, and implement cloud services. CDW helps clients navigate that maze.

Onward and upward

Demand for technology products and services appeared to strengthen in the spring, after a slow start to the year. CDW will announce its June-quarter results on Aug. 3, and analysts expect per-share earnings of $0.84, up 4%, on revenue of $3.65 billion, up 10%.

Stock buybacks, a recent point of emphasis, should help stoke per-share-profit growth. In May, the company raised its stock buyback plan by $750 million to a total of $891 million outstanding, enough to repurchase 12% of shares at their current price. CDW has reduced its share count 3% in the past year.

The timing for stock buybacks appears opportune, given CDW's low valuation. Shares trade at 13 times estimated 2016 earnings, a 29% discount to the median for S&P 1500 technology stocks. CDW has a trailing P/E ratio of 14, well below its sector median and its own five-year median, both 20. The stock earns a Quadrix Value score of 78.

An annual report for CDW Corp. is available at 75 Tri-State International, Lincolnshire, IL 60069; (847) 465-6000; www.cdw.com.

CDW
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
0.67
vs.
0.56
13%
41.89
-
30.40
14 - 10
Dec '15
0.73
vs.
0.59
12%
46.92
-
40.07
17 - 14
Sep '15
0.84
vs.
0.64
7%
41.99
-
33.01
16 - 13
Jun '15
0.81
vs.
0.67
7%
39.32
-
34.19
16 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
12.99
2.93
0.31
46.92
-
33.01
16 - 11
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
1.44
0.00
NA
-
NA
NA
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
81
78
93
36
28
45

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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