Critical Cloud Expansion And Digital Innovations Propel Future Growth Despite Market Challenges

Key Takeaways

• Investments in cloud and software as-a-service aim to boost recurring revenue and future growth.
  
• Enhanced digital capabilities and process improvements may increase customer loyalty and sales efficiency, driving long-term growth.
  
• CDW faces challenges from IT spending uncertainty, competitive pricing, shifting consumption models, and government spending unpredictability, impacting revenue growth and profit margins.

Catalysts

Provides information technology (IT) solutions in the United States, the United Kingdom, and Canada.

• CDW is investing in expanding its capabilities in high-growth cloud and software vectors, aiming to increase scale in as-a-service offerings, which could lead to increased recurring revenue streams and ultimately boost revenue growth in the future.
  
• The company is enhancing its digital capabilities to better serve customer needs, potentially increasing customer satisfaction and loyalty, which can drive revenue and potentially improve net margins through increased efficiencies.
  
• CDW is focused on maximizing sales professional productivity and reducing sales cycle times through improved processes, which could positively impact revenue by enabling more efficient sales operations.
  
• The strategic investments in larger projects, despite being lumpier and potentially impacting short-term results, are expected to drive long-term growth in revenues and earnings as these projects materialize.
  
• The continued focus on profitable growth and disciplined financial practices, including maintaining gross margin discipline even in highly competitive markets, should help sustain or improve net margins and earnings when market conditions improve.

CDW Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CDW's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.3% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $10.54) by about November 2027, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2027 earnings, up from 20.9x today. This future PE is greater than the current PE for the US Electronic industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

CDW Future Earnings Per Share Growth

Risks

• Continued challenges in the IT spending environment, combined with economic and geopolitical uncertainty, may lead to prolonged project delays and extended sales cycles, negatively impacting CDW's revenue growth.
  
• Increased competition and pricing intensity in the market, including irrational pricing, could compress CDW's profit margins, particularly in highly competitive sectors where firms may pursue uneconomic deals.
  
• The ongoing shift toward cloud and as-a-Service consumption models results in cyclicality in hardware demand; this transition might lead to inconsistent revenue as the hardware segment remains under pressure.
  
• Exposure to large-scale projects can create lumpiness in financial performance, as delays or reductions in these strategic deals can significantly affect year-over-year earnings, especially during low-demand periods.
  
• Uncertainty surrounding U.S. government spending, exacerbated by the upcoming election and potential policy changes, could limit growth prospects in the public sector and create unpredictability in public sector revenues.

Valuation

• The analysts have a consensus price target of $223.52 for CDW based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $190.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $23.3 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $174.05, the analyst's price target of $223.52 is 22.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.