CDW CORP CDW
January 05, 2021 - 7:26pm EST by
Nails4
2021 2022
Price: 128.00 EPS 6.69 0
Shares Out. (in M): 145 P/E 19 0
Market Cap (in $M): 18,500 P/FCF 0 0
Net Debt (in $M): 2,600 EBIT 0 0
TEV ($): 21,100 TEV/EBIT 0 0

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Description

This is an incredibly simple idea so I'll keep it brief.

 

CDW needs no introduction. It's been written up twice before on VIC. The last time was in 2014 by Krusty at a stock price of $28. At $128 today, the fundamental story is remarkably little changed. CDW is a best in class company in its industry. It will grow organically HSD, take share, expand margins, buy back stock. Yet, the shares trade 19x 2021 earnings today. I honestly can't see another company of similar quality out there that trades for a similar LT growth to valuation ratio. As far as I can tell, CDW is cheap because its core market -- SMBs -- have been hit hard by COVID. The numbers thru Q3 are still pretty horrible. However, I suspect tech spending by SMBs will bounce back, as they have always done. Thus, you are getting a high quality recovery play for a very reasonable price.

 

Intro

CDW is a value added distributor. It started out in the 1980s distributing just hardware. But over time, it's added a good amount of software and "solutions" revenues to its repertoire. It targets small to medium businesses (on average a few hundred employees), and institutions (healthcare, government, etc).

 

Unlike the likes of Ingram Micro, Arrow and other "generic" distributors, CDW has a heavier service / advice element. A lot of SMBs/institutions essentially use them as an outsourced IT department. They play a greater part in educating, supporting, and advising these customers. This allows them to earn better EBIT margins and ROICs. Indeed, CDW's ROICs are in the 30s vs "generic" distributors at ~10%. 

 

The VAR channel is one of the most important distribution channels for both hardware and software vendors. VARs have direct relationships with hundreds of thousands of small customers, which are inefficient to reach otherwise. People thought the model would be disrupted by cloud computing, but so far the VAR model has proven exceptionally resilient. If anything, a greater mix of software and service sales have enabled CDW to increase its EBIT margins gradually over time.

 

CDW is an exceptionally run organization. The special sauce is in the sales force. The culture of the sales force -- aggressive but also customer centric -- has proven very difficult to replicate. As such, CDW has much higher revenues / employee and EBITDA/employee versus its closest comps. It also pays its people more, which retains the best sales people, reduces customer churn, and preserves institutional knowledge. It's a virtuous cycle.

 

 

 

CDW also has best in class growth. Better than industry and closest peers. I'll also note that CDW's growth in recent years, unlike public comps, have been almost entirely organic.

Given the extreme fragmentation of the VAR landscape, there is no obvious reason why CDW's organic share gains will slow in the medium term.

 

 

*Note the sharp 2008/9 downdraft and the big bounce. I think by virtue of its end markets, CDW is more cyclical than other tech companies. Hopefully the cycle will repeat here after a very weak 2020.

 

Cloud Computing

The threat from Cloud has been the key secular bear point on this company for the last 10 years. 

Everyone needs to make their own determination here. But based on evidence so far, I'm not super concerned.

Cloud is potentially negative because:

1. It depresses hardware spending at the enterprise level. Hardware is instead going to belong to giant platform companies, who don't buy from CDW

2. Software companies can potentially go direct to consumer, and don't need to go thru VARs any more. Examples: MSFT, ADSK, ADBE

 

While (1) has probably happened on the margins, the pie is also still growing. Moreover, while complexity is removed from some places, more complexity is being added elsewhere (e.g. security products). Net/net, the end market dynamics are okay. 

 

For (2), I've been somewhat surprised... but although some very large companies have succeeded in going DTC for portions of their enterprise sales, it's not been a needlemover in the grand scheme of things. Moreover, new software companies are arising all the time, and they depend on the channel for distribution. A good example is the Converged Communications industry, which didn't really exist even 5 years ago. They heavily depend on channel for the SME market.

 

 

Putting everything together, I think we have a superbly managed company, best in class, safe balance sheet, highly cash generative, HSD organic growth longer term, low-mid teens EPS grower, trading for 19x NTM. I don't see many better risk/rewards in the market today.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

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