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By PhoolishPhilip
June 28, 2006

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It's been a while since I've offered a stock idea so here is one for you astute analysts to chew on: CDW Corporation (CDWC).

The Business:

From MSN we learn that CDW Corporation (CDW) is a direct marketer of multi-brand information technology products and services in the United States. The Company's product offerings include hardware and peripherals, software, accessories and other products. CDW offers more than 100,000 products, which include a range of technology products from brands, such as Adobe, APC, Apple, Cisco, Hewlett-Packard, IBM, Lenovo, Microsoft, Sony, Symantec, Toshiba and ViewSonic, among others. The Company provides a variety of value-added services and Web-based tools to its customers, including the ability to custom configure multi-branded solutions, manage software licenses through CDW's Software License Tracker tool, track tagged assets through the Company's IT Asset Management Tracking Database and generate online quotes. It also offers around-the-clock technical support and customer service to its customers.

The Current Situation:

The shares have taken a hit lately, falling from a high of $64 last July to $53.44 last Friday. The problem is slowing growth attributed to maturation of its business and a general slowdown in demand for computers and peripheral equipment. After averaging double-digit growth rates in sales and net income for much of the past decade, CDWC has seen sales growth slow to 7.7% and net income growth slow to 0.5% in the most recent quarter. Single digit growth seems to be on order in the near future, and it could get worse if we slip into a recession. Given the glum predictions about future growth, Mr. Market is pricing CDWC as a mature growth retail firm. It currently sports a PE of 16; well below its five-year average PE of 21.

The Balance sheet:

CDWC has no debt, $900 mil in cash and equivalents ($11/sh), and a book value of nearly $16/sh. Inventories and receivables seem to be inline with revenue growth. All in all the BS seems solid.

The Income Statement:

Over the past five years sales have grown 61.5% from $3.96 bil to $6.4 bil, pre-tax income has increased 54.6% from $280 mil to $433, and net income has increased 61.3% from $168.7 mil to $272.1 mil. Share count has decreased by 5 mil from 85 to 80, so net income has increased by 74.1% on a per share basis. Share price has appreciated 64.5% over the past five years from an average of $32.50 in 2001 to $53.45 today. The price seems to track organic growth fairly well.

Valuation:

Currently CDWC has a pre-tax earnings yield of nearly 10%, twice that of Ten Year treasuries, and an after tax yield of 6.2%. The dividend is $0.52 yielding 1% at present. CWDC is currently sporting a PE of 16, well below the five-year average of 21. If the shares were to trade up to this historical average we could expect a price of $69. The five year high average PE is 25, so with a manic nod from Mr. Market we might see a price of $82. A quick DCF analysis with the assumption of 9% growth for the next decade, a terminal growth rate of 5%, and a discount rate of 9.5% gives us a current value of $68/sh. Lower the growth rate to 7% and you get $58/sh. Tank the growth rate to 5% in perpetuity and you get $52/sh. Assume that the company grows at the rate of inflation forever (3.5%) and discount the shebang by 9% and you get a present value of $45.50/sh. Valuepro gives it a value of $82/sh. Finally the shares are trading at ten year lows in term of p/b and p/s. Current p/s is .66 and p/b is 3.38. The ten-year average is 1.02 p/s and 5.75 p/b. If the share price were to revert to these means the price would be close to $80.

Conclusion:

CDWC seems to be a strong company with a stable earnings history and a solid balance sheet that is trading on the low end of its historical value ratios. Currently plagued by slowing growth, Mr. Market seems to be valuing the company based on some pretty pessimistic long-term growth assumptions. I believe that the current price incorporates a mid single digit long-term growth rate despite the fact that the company is growing in the high single digits. While this growth rate is below its historical double-digit growth rate it is better than the markets expectations. The shares seem to me to be worth between $58 on the low end to $80 on the high end. There does not seem to be a lot of down side risk at these prices. While $80 might be an ambitious expectation it is not outside of the price we would expect based on historical averages. An expectation of $60-70 is certainly not unreasonable, indeed I think it conservative.

Comments Appreciated.

PP


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