Evolving IT Market Will Uncover Cloud And SaaS Potential

Key Takeaways

• Cautious customer sentiment and reduced government spending could restrict CDW's revenue growth, particularly in public sector channels.
  
• Economic uncertainties in the U.K. and Canada, along with low IT market growth, might limit CDW's earnings expansion despite strategic investments.
  
• CDW's revenue and earnings face pressure from hardware deprioritization, government funding shifts, and international market uncertainties.

Catalysts

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

• CDW anticipates low single-digit growth in the U.S. IT market for 2025, coupled with a cautious customer sentiment, which suggests potential limitations on future revenue growth.
  
• The decline in government and education spending due to funding cycles and political uncertainties could impede top-line growth, especially in the public sector channels where CDW has a significant presence.
  
• The shift in customer focus towards cost efficiency and short-term ROI projects may impact CDW's revenue growth as large project purchases remain hesitant.
  
• The company expects ongoing pressures on international operations due to economic uncertainties in the U.K. and Canada, which could hinder revenue growth in these regions.
  
• While CDW's strategic investments in cloud, SaaS, and services are positioning it for future growth, the current market environment characterized by low IT spend growth and pricing pressures on hardware might limit significant earnings growth in the near term.

CDW Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CDW compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CDW's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.1% today to 6.1% in 3 years time.
• The bearish analysts expect earnings to reach $1.3 billion (and earnings per share of $9.96) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 18.5x today. This future PE is greater than the current PE for the US Electronic industry at 19.4x.
• 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 experienced a 3% decline in their overall top line for 2024 due to the hardware deprioritization, negatively impacting revenue.
  
• Education saw a 2% decline owing to the lack of stimulus-based government funding for K-12, which can impact CDW’s sales in the public sector.
  
• CDW faced a decrease in net sales in the government sector driven by federal end market uncertainty and spending pauses, posing a risk to revenue stability.
  
• Operating income margin decreased from 10.3% to 9.6%, and net income was down 4.5% year-over-year because of higher expenses, suggesting a potential decline in earnings.
  
• Exchange rate fluctuations and political changes in the UK and Canadian markets contribute uncertainty, likely affecting international revenues and worldwide operating income.

Valuation

• The assumed bearish price target for CDW is $179.8, which represents one standard deviation below the consensus price target of $207.43. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $21.9 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $151.47, the bearish analyst price target of $179.8 is 15.8% 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.