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Wall Street’s Best Digest Daily Alert: (CDW)

This tech stock beat analysts’ estimates, reporting $0.86 EPS vs. the $0.79 forecast.

This tech stock beat analysts’ estimates, reporting $0.86 EPS vs. the $0.79 forecast.

CDW Corporation (CDW)
From Dow Theory Forecasts

CDW (CDW) shares returned 25% including dividends in 2016, outpacing the 15% total return for the S&P 1500 technology sector and 13% for the broad index. Despite its strong run, CDW’s stock still looks cheap at 16 times trailing earnings, a 21% discount to its three-year median and a 27% discount to the median for S&P 1500 technology stocks.

Equally important, we see several catalysts that could keep the shares humming along in the year ahead. CDW is a Focus List Buy and a Long-Term Buy.

Primed for upside CDW resells technology hardware, software, and services to more than 250,000 customers. Over the past decade, it has steadily outgrown rivals to carve out a 5% share of the fractured U.S. and Canadian market.

CDW’s operating momentum has decelerated in recent quarters. Sales rose 6% in the three months ended September, the slowest gain since the March 2015 quarter. Although cash from operations is up 27% for12 months ended September, growth has been unsteady—it has risen in just two of the past seven quarters. In the September quarter, CDW noted pricing pressure, softer demand, and delays for large deals.

Encouragingly, optimism among small-business owners rose sharply in November, painting “a starkly different picture than we’ve seen in the last 94 months,” according to The National Federation of Independent Business. Improving sentiment could embolden companies to increase
investment in technology products.

CDW is a primary beneficiary of the improving U.S. economy, especially for small and midsized businesses. CDW generates more than 90% of its revenue in the U.S., and about half comes from companies with less than 5,000 employees.

CDW’s business carries some risk. It draws 13% of revenue from the U.S. government and local agencies, which could face budget cuts under President Trump. Its highly-levered balance sheet is exposed to rising interest rates—about $1.5 billion of its $3.22 billion in long-term debt is subject to variable rates.

Finally, CDW faces an investigation by the U.S. Securities and Exchange Commission into incentives offered by its vendor-partnership program. But analyst estimates for 2017 have drifted higher in the past 90 days, with the consensus targeting 9% higher per-share profits and 5% revenue growth. Greater business activity and a lower tax rate could make estimates look conservative.

For the December quarter, analysts expect CDW to report earnings per share of 0.81, up 11%, on revenue growth of 3%. Estimates have held firm over the past 60 days. CDW has surpassed the profit consensus in each of the 10 past quarters. The company will announce December-quarter results on Feb. 7. WSBI Editor’s note: The company beat estimates, earning $0.86 compared to the $0.79 analysts had expected.

Richard J. Moroney, CFA, Dow Theory Forecasts,, 800-233- 5922, January 30, 2017