Standing out among the Street's worst performers today is CDW, a specialty retail company whose shares slumped -13.3% to a price of $165.02, 23.29% below its average analyst target price of $215.11.
The average analyst rating for the stock is buy. CDW underperformed the S&P 500 index by -13.0% during today's morning session, but outpaced it by 13.0% over the last year with a return of 6.3%.
CDW Corporation provides information technology (IT) solutions in the United States, the United Kingdom, and Canada. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
CDW's trailing 12 month P/E ratio is 20.3, based on its trailing EPS of $8.13. The company has a forward P/E ratio of 14.6 according to its forward EPS of $11.27 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
CDW's PEG ratio of 1.29 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of CDW's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 23,748,700 | 19,062,100 | 19.73 | 15.11 |
| 2021-12-31 | 20,820,800 | 17,252,300 | 17.14 | -1.38 |
| 2020-12-31 | 18,467,500 | 15,257,400 | 17.38 | 3.08 |
| 2019-12-31 | 18,032,400 | 14,992,500 | 16.86 | n/a |
- Average gross margin: 17.8 %
- Average gross margin growth rate: 4.0 %
- Coefficient of variability (lower numbers indicating more stability): 7.4 %
We can see from the above that CDW business is not strong and its stock is likely not suitable for conservative investors.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for CDW was $1,208,100,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, CDW is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 11.2% and has on average been $959,975,000.00.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Cdw's P/B ratio is 13.9 -- in other words, the market value of the company exceeds its book value by a factor of more than 13, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
CDW is likely overvalued at today's prices because it has an average P/E ratio, an elevated P/B ratio, and a steady stream of positive cash flows with an upwards trend. The stock has poor growth indicators because of its consistent yet thin operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into CDW's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
