The Bottom Fishing Club: CDW – CDW Corporation (NASDAQ:CDW)

CDW Corporation (CDW) is an integrated information technology (IT) solutions provider to businesses, governments, educators, and healthcare customers in the United States, the United Kingdom, and Canada. Effectively a middle man between product vendors making equipment and end-users, the company is becoming a larger player each year networking smaller & large businesses, public schools, colleges, local, state & federal governments, doctor’s offices, hospitals and work from home setups. In my opinion, the aftermath of the coronavirus shutdown and expanding gig economy could greatly enhance CDW’s value proposition for customers and operating growth prospects in coming years.

Image Source: Company website

The company’s sales are derived from a number of industries, customers and product solutions. Customers are matched with high-technology computers, phones, network items – whatever might make individuals and businesses more successful and productive – with personalized help from IT professionals. During 2019, CDW delivered $18 billion in sales, using a pool of 1,000 brands and 100,000 products to meet customer demand.

2018 and 2019 were extremely good years for the company. High business growth rates of 10-15% annualized pushed CDW stock to double in price over 24 months, before coronavirus issues appeared. Below is a description of the sizable and quickly expanding market CDW services. Using the company’s estimate, CDW has only penetrated about 5% of the marketplace. The technology market is very confusing, with innumerable possible solutions for each individual consumer/business/organization situation. CDW is becoming the expert consultant millions of IT users tap to deliver the right fit, lowest-cost solutions for personalized needs.

Image Source: Investor Presentation

Fundamental Business Evaluation

CDW’s profit margins and returns have been smartly improving for years. Gross and net profit margins, plus returns on equity and total assets, were at record highs during 2019. I have the superb operating business results pictured below for the last five years.

From my research, the 2020 stock drop has pulled CDW’s basic financial ratios into Buy territory. Price-to-earnings, cash flow and book value readings are near 5-year lows, represented on the graph below.

Below, I am charting the big changes the price tank has made on CDW’s price-to-sales valuation, paired against the spike higher in available dividend yield. CDW stock can now be purchased at a 5-year normal price-to-sales ratio, while the business is expanding at incrementally increasing margins on sales. It’s a win-win proposition for growth investors. Plus, income and total return investors can now capture a record high dividend yield of 1.7% at $79 a share. Instead of a dividend yield one-half the level of the Treasury yield curve three months ago, investors today can lock-in a yield well above the entire Treasury yield curve. The best news regarding the dividend is that CDW’s $1.52 annual payout represents about 22% of cash flow generation in 2019, an ultra-low number versus other companies in the S&P 500.

Technical Trading Clues of a Bottom

Falling almost 45% the last several months with the market swoon related to the coronavirus economic slowdown, CDW has given back two years of gains. At some point soon, I expect the stock will bottom and reverse higher. Below, I am drawing some of the evidence that selling intensity is overdone.

The 14-day Relative Strength Index [RSI] has been oversold near a reading of 20 the whole month of March. The 14-day Average Directional Index [ADX] moved above 50 last week, circled in green. This extreme trend level on a sell-off is rarely achieved by profitable blue-chip businesses with bright futures. Of course, the 2020 stock market dive has pushed hundreds of U.S. equities to similar oversold ADX levels in March.

Yet, the rising Negative Volume Index [NVI] the last six months, circled in red, tells us “volume”-sized liquidations have not been part of the sell-off story for CDW. Plenty of bargain hunters have appeared on lower-volume “up” days. It may be the decline is related to opportunistic selling (locking in profits) from a high-flying peak, exaggerated by the 35% stock market dive. In time, the company’s quote may begin to climb again, given a flat market environment, as operating performance proves resilient in the face of recession.

Final Thoughts

In terms of Wall Street’s valuation of robust operating results, CDW was a top S&P 500 performer during 2018-19. Again, the company was projected to grow nicely in 2020-21 before coronavirus. Wall Street analysts were estimating earnings per share of $6.50 this year and $7.25 next, with a rough increase in sales of 5% annually. No doubt, these targets will fall short in 2020 as the economy slides into recession during March. However, the 45% stock price tank in early 2020 may be an overreaction versus still-bright long-term prospects.

The IT market served by CDW should continue to expand rapidly relative to the overall economy. The company is becoming a leader in the sales, consultation and distribution of technology products and related services. Large computer makers are increasingly become reliant on sales from third parties like CDW. Customers are becoming more experienced with the CDW access point when acquiring technology products. Together, the company is gaining substantial bargaining power on cost/price with both sides of the equation as the middle-man supplier of IT to America.

Revenues come from a diverse and growing group. Suppliers are numerous and expanding. Income margins are rising. The dividend is covered and increasing each year. Plus, valuations for investment are worth serious consideration with the latest drawdown in share price. 2020’s sharp sell-off may be an early Christmas gift for intelligent, long-term investment. Thanks for reading.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CDW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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