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Motley Fool Stock Advisor recommendation CDW (NASDAQ:CDWC) didn't wow Wall Street with its fourth-quarter results. The stock fell from $72 to the current price of $62. Might this be an opportunity, or do investors sense that the glory days are over? To help out, let's take a peek at the company's recent 10-K filing.
CDW is a big-time distributor of tech products, providing businesses nationwide with products from the likes of Adobe, Apple, Cisco, Hewlett-Packard (NYSE:HPQ), IBM, and Symantec (NASDAQ:SYMC). CDW will set everything up, then provide support after the sale. It carries more than 100,000 products, including printers, software, servers, memory, and data storage equipment.
Management has done well dealing in compensating for the industry-wide deterioration of tech pricing and margins. Last year, the company recorded a gross profit margin of 15.8%, while its operating margin stood at 6.8%. Compare its fiscal 2006 margins with those of some of its competitors:
|
Company |
Gross Margin |
Operating Margin |
|---|---|---|
|
CDW |
15.8% |
6.8% |
|
Insight Enterprises |
12.55% |
2.71% |
|
PC Connection |
12.24% |
1.61% |
|
Systemax |
14.62% |
2.64% |
Those impressive metrics clearly indicate that CDW has mastered efficiency. It's built a platform to integrate a complex mesh of real-time information, two massive distribution centers, and its various websites for partners, customers, and employees.
Don't assume that the company is perfect, though; it's now facing some perilous industry trends, including tech manufacturers' increasing willingness to sell directly to customers. Even Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) are becoming serious threats to CDW's tech-supply empire.
These forces weighed on CDW's growth in 2006. Sales growth lagged prior years, rising only 7.8% to $6.685 billion. There were bright spots, though: Revenues grew by more than 10% for notebooks, accessories, networking products, and memory, while public-sector sales increased 15% to $2.162 billion
These encouraging trends haven't helped keep CDW's core business from lagging. Growth in corporate business was just 2.3%, with revenues of $4.514 billion. The sales slump may stem from CDW's restructuring of its workforce, in an attempt to help deepen customer relationships. As is the case with most tech companies, the process has been disruptive, but management believes that things are now on track.
CDW is hoping to gain a shot of growth from its $175 million acquisition of Berbee in September. The newly purchased company provides advanced consulting services for products from Cisco, IBM, and Microsoft (NASDAQ:MSFT). CDW thinks it can double Berbee's current top line of roughly $400 million within five years. That may be overly optimistic, but in its favor, CDW does have an extensive customer list to steer in Berbee's direction.
The deal seems necessary in order for CDW to meet its stretch goal of $10 billion in revenues by 2008. If it meets that target, its stock will doubtlessly reflect that success.
I think the Berbee deal is a nice start, but CDW still has plenty of work ahead. Cultural differences, conflicts with sales organizations, and the risk of customer defections can all make tech deals tough to pull off, but I still suspect that CDW will only increase its dealmaking going forward.
In the short run, this could unnerve investors, who have become accustomed to big stock buybacks and dividend payments. Such distributions amounted to $268 million last year. With about $392 million in the bank, a few acquisitions would rapidly consume the corporate treasury.
For the most part, it appears that CDW is in the midst of a slow and steady transition. Until all its parts come together, Fools may be wise to hold back on any potential investments here.
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CDW and Costco are Motley Fool Stock Advisor picks. Microsoft, Wal-Mart, and Symantec are Inside Value picks. Try any of our Foolish newsletters free for 30 days.
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares of companies mentioned in this article. He is currently ranked 1,590 out of 24,619 in CAPS.
