CDW Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

CDW Corporation is a leading provider of integrated IT solutions to businesses, education, government and healthcare organizations, primarily in the US, UK, and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

CDW’s business is primarily focused on providing information technology (IT) solutions to businesses, spanning from selling hardware and software to providing services. Their business segments include:

  • Corporate: This segment caters to large corporate organizations with complex IT needs.
  • Small Business: Focused on small and mid-sized businesses.
  • Public: This segment serves governmental organizations, educational institutions, and healthcare entities.

Business Overview

  • Revenue Distribution: CDW’s revenues come from a diversified base across different business segments. The majority of their revenues originate from the US, with a significant contribution also from Canada and the UK.
  • Trends in the Industry:
    • The IT industry is constantly evolving, requiring ongoing adaptation, innovation, and adoption of new technologies.
    • As a technology company, CDW needs to keep up with current industry trends as well as economic cycles.
    • Customers require a complex range of services to help them manage their IT spending and goals.
    • Cloud and cybersecurity are very hot areas.
  • Margins: CDW’s operating margins are good, but fluctuate somewhat with higher and lower sales periods. They generate above average margins in high-margin sectors.

  • Competitive Landscape: The IT solutions industry is highly competitive, with various players ranging from large global technology companies to smaller regional providers.

    • The industry is highly competitive and it is difficult for new entrants due to high entry barriers.
    • The markets they operate in are highly competitive with intense competition and a lot of similar firms with similar products.
  • Differentiation: CDW differentiates itself through a customer-centric approach and high sales capabilities, where it focuses on delivering a wide range of products and services tailored to each customer’s specific requirements. They have 90% returning customer base which demonstrates their customer success and value proposition. The company emphasizes building long-term customer relationships rather than only focusing on short-term goals.

Moat Analysis

Based on the information provided, CDW’s moat can be rated 3 out of 5.

  • Switching Costs: CDW has successfully integrated itself into clients’ operations, generating strong customer lock-in and creating high switching costs for clients. Many of their products and services are tightly integrated into the daily operations of their customers.
  • Network Effects: They have a large base of customers and vendors which increases their sales and gives them an advantage as they gain more insight in the market.
  • Scale advantages: CDW is one of the largest IT solutions companies. That gives it some scale in buying and servicing their large customers. However, they do not operate on a global scale, but on regional level.
  • Intangible Assets: CDW has built a strong reputation, but it isn’t a well-known brand like Coca-Cola.
  • Overall: While CDW possesses certain competitive advantages like high customer retention and some scale and operational know how, these do not add up to a wide moat. There are significant competitors in all markets they operate in.

Moat Risks and Business Resilience

Several risks can impact CDW’s business and its moat:

  • Technological Disruption: Rapid changes in technology might threaten to erode CDW’s value proposition as a provider of IT solutions, if they are not quickly adapting to it. Companies are increasingly looking for their own IT infrastructure as cloud computing has become more powerful, this could reduce the business of a supplier like CDW.
  • Competition: Intense competition might squeeze margins and affect their ability to maintain customer lock-in.
  • Economic Downturn: A downturn can slow growth and decrease IT spending by customers. During the recession of 2008, Home Depot and Lowes, for example, faced headwinds. The ability of an IT firm to grow depends greatly on the overall economic environment, so it is subject to economic downturns.
  • Cybersecurity: Increased concerns in cybersecurity may force customers to diversify their IT providers, reducing their dependence on CDW.
  • Customer Concentration: The company has big customers. Some of them might seek other vendors. Loss of one or multiple big customer might significantly affect their profits and revenues.

Despite these risks, CDW’s high customer retention rate, diverse business segments, and strong client integration provide some degree of business resilience. They benefit from diversification in their revenues and long-term customer relationship.

Financials Deep Dive

  • Revenue Growth: Over the past 5 years their sales growth has been uneven due to external macroeconomic factors. In 2022 their sales growth was much higher than the expected trend, however, it was mainly due to inflation and passing prices to their customers. In 2023, the company saw flat sales growth. Overall, the company is able to somewhat match market rate of growth, but have not showed consistent above average returns for the long term.
  • Operating Income: Their operating income has risen over the last few years, due to higher gross profit margin. They have seen a slight decline in gross margin in Q2 2023.
  • Net Income: They are profitable but earnings growth has been fluctuating due to variations in operating income and interest expense. The company is very sensitive to interest rate fluctuations.
  • Return on Invested Capital (ROIC): Their ROIC has varied during the time but stays between 10 to 15% which is not very high. However, it seems to be improving in 2023.
  • Cash flow: The free cash flow is relatively consistent with fluctuations based on capital investment of the company and acquisitions. This is good because their cash flow isn’t heavily affected by market fluctuations and revenues.
  • Debt: The Company has a sizeable amount of debt, but their debt level has been fluctuating a bit. They have had to increase their debt to finance acquisitions, which might have hurt their balance sheet in the long term, if those acquisitions do not pan out. They may need to focus on paying down their debt instead of growing their revenues. However, they have been keeping their leverage in control, so their financial situation is quite good.
  • Stock Repurchase: CDW’s policy is to return capital to investors with stock repurchases, which also offsets stock dilution, and signals a confidence in the company.

Understandability Rating

Based on all the factors the business model is more complex than a normal consumer product. The interplay of the various financial statements in determining value requires some financial expertise to fully understand and correctly value. For these reasons, the business is relatively difficult to understand by an average investor. We rate its understandability a 2 out of 5.

Balance Sheet Health Rating

CDW has a fair financial position. They have sufficient cash flow and they pay dividends. However, they do have significant debt but they are controlling their leverage in the near term. For these reasons, we rate its balance sheet health a 4 out of 5.

This rating could fluctuate if the company takes on too much debt for acquisitions. They need to be careful on how they proceed with acquisitions and maintain an overall financial health.

Recent Developments, Concerns and Management Perspective

  • Impact of Macroeconomic Conditions: CDW noted that the macroeconomic environment continues to be volatile, which requires the company to be agile in its operations. They have been seeing longer sales cycles due to their customers facing budgetary pressures. However, they still believe that the long term trends are positive for the IT industry.
  • Slowing Sales: Recent earnings calls have mentioned a slowdown in the pace of growth because of the macro economy and inflationary environment. The company is taking actions to drive more sales but it is to be seen if they will have the required impact.
  • Investments in Long-Term Growth: CDW is focusing its efforts on long-term investments, including their own technology and digital transformation, which are likely to help them in the long-run.
  • Capital allocation: They mention that they are also focusing on maintaining an appropriate capital allocation policy for debt repayment.