Upbeat prospects for IT spending in US could boost CDW's fortunes
The IT managers of big or small companies are unlikely to head to Harvey Norman, PC World, or some other well-known retailer when their company needs some new PCs for new employees. Instead, they use what are called value added resellers (VARs) to purchase everything from hardware, to software, to cloud services - and anything in between.
Should that company happen to be in North America or the United Kingdom, there is a good chance the VAR in question is CDW Corporation.
Based outside Chicago, CDW is a leading multi-brand technology solutions provider to enterprise, small business, government, education and healthcare facilities. The firm buys from original equipment manufacturers (OEMs) and wholesalers for resale to its customers. The firm services more than 250,000 customers.
Its product portfolio of over 100,000 items (representing more than 1,000 brands) includes hardware and software products, integrated IT solutions used in mobility, data-centres, cloud computing, virtualisation and collaboration. Today, CDW employs over 8,000 staff, 6,000 of whom are customer-facing and 2,000 of whom are field salespersons, field engineers and technology specialists. CDW is a key strategic partner to many of the largest technology companies in the world, including Adobe, EMC, Cisco, Microsoft, HP, NetApp, Lenovo, Symantec, and VMware. The company sells into its five main customer verticals and each of these contributed at least $1bn in sales annually.
CDW recently expanded its relationship with Dell, which has added some incremental revenue growth, but the long-term potential is much higher as Dell appears to be transitioning to more of an indirect go-to-market model which should drive incremental volume and revenue through CDW's network. CDW has, through scale, developed a stable business model with attractive gross and operating margins. The model is also characterised by a variable cost structure which means profits grow approximately at the same rate as sales but downside risk is mitigated.
In addition to maintaining close customer relationships, CDW has large distribution and configuration capabilities at its two distribution centres. This allows it to forego an IT distributor and procure directly from OEMs in some circumstances. CDW also has drop shipment arrangements with many of its largest OEMs, which is more profitable for CDW.
The outlook for IT spend remains positive, particularly in the US, where good economic growth is combining with benefits from last year's tax reform measures, giving businesses of all sizes the chance to invest in IT infrastructure. Cloud computing, Big Data, and cybersecurity are also requiring companies to spend money.
Although CDW is a leader in the US market, it still has plenty of scope to take market share in what is a very fragmented market.
Formerly owned by private equity, CDW was listed on the stock market in 2013 and since then has returned more than $1.4bn to shareholders in the form of dividends and share buybacks. Indeed, in 2017 alone, the firm repurchased $534m worth of shares.
While it might not sound like the sexiest part of the technology world, CDW has many avenues of growth and a business model which should see it capture market share. But don't take my word for it - ask your IT managers where they shop!
Aidan Donnelly is head of equities in Davy Private Clients. For disclosures, visit davy.ie/AidanDonnelly
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