Investment In Cloud, AI, And Healthcare Will Improve Future Customer Solutions

Key Takeaways

• Strategic focus on cloud, healthcare, and AI enhances customer solutions and positions CDW for growth in high-demand sectors and improved margins.
  
• Targeted market outperformance with strategic initiatives and investments aims to boost earnings, despite economic headwinds.
  
• Macroeconomic risks like inflation and policy changes threaten CDW's revenue growth, with weak hardware sales and international market challenges exacerbating instability.

Catalysts

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

• CDW's continued focus on cloud, SaaS, and managed services, particularly through its acquisition of Mission Cloud Services, positions the company to capitalize on growth in these high-demand areas, potentially driving future revenue and improving gross margins.
  
• The investment in healthcare expertise and technology transformation centers could lead to sustained high performance in the healthcare vertical, supporting revenue growth through deeper customer engagement and tailored solutions.
  
• CDW's strategic emphasis on expanding technical and industry expertise, particularly in fast-growing sectors like cloud and AI, is expected to enhance customer solutions and drive top-line growth by addressing complex, multi-brand environments.
  
• The company targets market outperformance by 200 to 300 basis points in 2025, suggesting strategic initiatives and capital allocation (including share repurchases and dividends) could bolster earnings per share growth despite macroeconomic challenges.
  
• CDW's dedication to maintaining a balanced portfolio across diverse end markets and product solutions is geared towards capturing customer demand shifts, which may improve net profit margins by optimizing product and service mix.

CDW Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CDW's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 5.6% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $9.97) by about April 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, up from 19.9x today. This future PE is greater than the current PE for the US Electronic industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

CDW Future Earnings Per Share Growth

Risks

• CDW reported a decline in non-GAAP operating income and net income per share, reflecting slight expense deleverage. This could impact net margins and overall profitability.
  
• The company experienced hardware deprioritization on its top line, which led to a 3% decline in net sales for the full year. Continued weakness in hardware sales may challenge revenue growth.
  
• Uncertainty in public spending, particularly from federal and education sectors due to policy changes and stimulus funding ending, poses a risk to revenue stability in these key markets.
  
• Challenges in international markets, driven by economic and political uncertainty in the UK and Canada, could lead to volatility and pressure on revenue and earnings growth.
  
• CDW acknowledges macroeconomic risks such as inflation, tariffs, and political change, which could impact customer demand and consequently affect revenue and earnings forecasts.

Valuation

• The analysts have a consensus price target of $224.427 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 $240.0, and the most bearish reporting a price target of just $201.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $23.9 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 8.1%.
• Given the current share price of $162.08, the analyst price target of $224.43 is 27.8% 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.