CDW Prepares For Its Encore

1/30/2017


  Recent Price
$52
  Dividend
$0.64
  Yield
1.2%
  P/E Ratio
16
  Shares (millions)
165
  Long-Term Debt As % Of Capital
76%
  52-Week Price Range
$55.47 - $30.40

CDW ($52; CDW) shares returned 25% including dividends in 2016, outpacing the 15% total return for the S&P 1500 technology sector and 13% for the broad index. Despite its strong run, CDW's stock still looks cheap at 16 times trailing earnings, a 21% discount to its three-year median and a 27% discount to the median for S&P 1500 technology stocks. Equally important, we see several catalysts that could keep the shares humming along in the year ahead. CDW is a Focus List Buy and a Long-Term Buy.

Primed for upside

CDW resells technology hardware, software, and services to more than 250,000 customers. Over the past decade, it has steadily outgrown rivals to carve out a 5% share of the fractured U.S. and Canadian market.

CDW's operating momentum has decelerated in recent quarters. Sales rose 6% in the three months ended September, the slowest gain since the March 2015 quarter. Although cash from operations is up 27% for 12 months ended September, growth has been unsteady — it has risen in just two of the past seven quarters. In the September quarter, CDW noted pricing pressure, softer demand, and delays for large deals.

Encouragingly, optimism among small-business owners rose sharply in November, painting "a starkly different picture than we've seen in the last 94 months," according to The National Federation of Independent Business. Improving sentiment could embolden companies to increase investment in technology products.

CDW is a primary beneficiary of the improving U.S. economy, especially for small and midsized businesses. CDW generates more than 90% of its revenue in the U.S., and about half comes from companies with less than 5,000 employees.

CDW's business carries some risk. It draws 13% of revenue from the U.S. government and local agencies, which could face budget cuts under President Trump. Its highly levered balance sheet is exposed to rising interest rates — about $1.5 billion of its $3.22 billion in long-term debt is subject to variable rates. Finally, CDW faces an investigation by the U.S. Securities and Exchange Commission into incentives offered by its vendor-partnership program.

But analyst estimates for 2017 have drifted higher in the past 90 days, with the consensus targeting 9% higher per-share profits and 5% revenue growth. Greater business activity and a lower tax rate could make estimates look conservative.

Conclusion

For the December quarter, analysts expect CDW to report earnings per share of 0.81, up 11%, on revenue growth of 3%. Estimates have held firm over the past 60 days. CDW has surpassed the profit consensus in each of the 10 past quarters. The company will announce December-quarter results on Feb. 7.

The dividend, launched in 2013, has been raised at least 49% in each of the past three years. CDW seeks to keep raising its dividend every year, ultimately reaching 30% of annual free cash flow, up from 22% today. The stock yields 1.2%. 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
Sep '16
0.97
vs.
0.84
6%
47.50
-
39.17
15 - 12
Jun '16
0.93
vs.
0.81
11%
43.11
-
37.80
14 - 12
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
           
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
58
70
94
33
73
67

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


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