Mission Cloud Services And Healthcare Investments Will Drive Renewed Success

Key Takeaways

• Strategic investments in healthcare, cloud, and SaaS are projected to surpass U.S. IT market growth, with significant revenue and earnings expansion opportunities.
  
• Increased share repurchase authorization suggests a commitment to shareholder value, likely enhancing earnings per share.
  
• Competitive pressures, elongated sales cycles, and lack of government funding strain CDW's revenue growth and margin maintenance within low growth environments.

Catalysts

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

• CDW's strategic investments in high-growth sectors like healthcare, cloud, and SaaS are expected to drive revenue growth and enable the company to outpace expected low single-digit growth in the U.S. IT market by 200 to 300 basis points.
  
• The acquisition of Mission Cloud Services is expected to enhance CDW's capabilities in cloud services, which is anticipated to have a significant impact on strategic growth and provide future revenue and earnings expansion opportunities.
  
• CDW's creation of proprietary solutions, such as the patient room solutions in healthcare, which combine AI and IoT technology, showcase potential for improving client satisfaction and may lead to increased customer retention and revenue.
  
• The company's capital allocation strategy, emphasized by the $750 million increase in share repurchase authorization, indicates a focus on returning value to shareholders, which is likely to positively impact earnings per share.
  
• CDW’s emphasis on deepening technical and industry expertise, as well as building robust consulting and cloud-based offerings, supports its goal to maintain strong gross margins and pursue profitable growth, driving overall net income improvements.

CDW Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on CDW compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming CDW's revenue will grow by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.1% today to 5.6% in 3 years time.
• The bullish 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 28.4x on those 2028 earnings, up from 18.6x today. This future PE is greater than the current PE for the US Electronic industry at 19.3x.
• 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 8.04%, as per the Simply Wall St company report.

CDW Future Earnings Per Share Growth

Risks

• CDW's full year consolidated gross profit declined by 1% compared to 2023, indicating a potential inability to maintain profitability, impacting earnings.
  
• A cautious customer sentiment and elongated sales cycles contributed to a 1.8% decline in net sales, affecting overall revenue growth.
  
• Pressure on non-GAAP operating income and net income due to deleverage issues amidst an environment of low to no growth could impair net margins.
  
• The absence of stimulus-based government funding programs has negatively impacted the K-12 education market, which may further constrain revenue growth in public sector sales.
  
• Competitive pressures, notably in client devices where compression in product margins has been observed, could erode gross margins over time.

Valuation

• The assumed bullish price target for CDW is $240.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CDW's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $160.0.
• In order for you to agree with the bullish analysts, 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 28.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of $152.03, the bullish analyst price target of $240.0 is 36.7% 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.