Analysts' Choice: Tech Supplier CDW Distributes Gains

9/4/2017


  Recent Price
$62
  Dividend
$0.64
  Yield
1.0%
  P/E Ratio
17
  Shares (millions)
159
  Long-Term Debt as % of Capital
79%
  52-Week Price Range
$66.33 - $43.46

Since late 2016, companies and government agencies have boosted spending on both computer equipment and big-ticket projects that had been delayed for years. Gusts of an improving environment for information-technology spending have pushed shares of CDW ($62; CDW) 20% higher this year, outpacing the 9% gain of the S&P 1500 Index. We see room for the shares to run higher, given CDW's improving outlook, modest valuation, and strong Quadrix scores. CDW is a Focus List Buy and a Long-Term Buy.

Business breakdown

CDW holds a roughly 5% share of its addressable markets, which include such hardware products as personal computers, tablets, data storage, monitors, and printers. CDW also sells virtualization and security software, along with cloud services.

U.S. corporate customers represent 51% of CDW's sales and government customers 39%, the latter fairly evenly split among schools, hospitals, and federal, state, and local agencies. The remaining 10% of sales comes from Canada and the United Kingdom.

In the 12 months ended June, CDW grew per-share profits 29%, revenue 6%, and operating cash flow 36%. The combination of increased competition and higher sales of lower-margin hardware products has narrowed profit margins in recent quarters.

In the first half of 2017, CDW's sales grew 9% for government customers, consistent with growth in the first half of 2016. Sales to enterprise customers jumped 7%, up from 2% for the same period last year. Recent growth is fairly balanced among large companies, up 7%, and small businesses, up 10%.

With corporate technology spending on the rise, CDW is gaining share in the fragmented North American market. Earlier this month, CDW raised its growth forecast for U.S. tech spending to 3.5% to 4% for the year. Management expects to outgrow the U.S. market by 2% to 3%.

Conclusion

Yielding 1.0%, CDW has raised its quarterly dividend more than 45% in three consecutive years, making each announcement in the first week of November. Investors should expect another big hike in 2017, given CDW's low payout ratio of 18% and its surging free cash flow, up 50% in the last year to $499 million. Management expects the dividend to represent 30% of free cash flow in five years; it currently distributes about 20% of free cash flow.

CDW shares still look cheap at 17 times trailing earnings, near their lowest level since the company went public in July 2013. The S&P 1500 technology sector has a median trailing P/E ratio of 20, in line with CDW's own three-year median.

Analysts target 10% per-share-profit growth in the September quarter and 15% growth in the December quarter. CDW has met or exceeded the consensus profit estimate in each of the past 12 quarters. If CDW matches the current consensus profit estimate for 2017 of $3.81, and its P/E ratio reverts to historical and sector norms, the shares would reach $76 by early 2018.

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
Jun '17
1.03
vs.
0.93
9%
66.33
-
55.80
19 - 16
Mar '17
0.75
vs.
0.67
7%
61.00
-
50.49
18 - 15
Dec '16
0.86
vs.
0.73
2%
55.47
-
43.64
17 - 13
Sep '16
0.97
vs.
0.84
6%
47.50
-
39.17
15 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
13.98
3.43
0.48
55.47
-
30.40
16 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
76
64
94
33
73
64

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


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