CDW Financial Analysis

Analysis Date: 2/6/2025

Business Model

CDW Corporation is a multi-brand provider of information technology solutions to business, government, education, and healthcare customers in the United States, the United Kingdom, and Canada.

Revenue Sources

• Products: Hardware, Software and Solutions from various technology brands.
• Services: Cloud, SaaS, managed services, professional services, and security services.

Revenue Distribution by Channel

• Corporate: $2,344.9 million Net sales in Q4 2024
• Small Business: $380.0 million Net sales in Q4 2024
• Public: $1,854.0 million Net sales in Q4 2024 (Government, Education, Healthcare)
• Other (UK & Canada operations): $607.1 million Net sales in Q4 2024

Income Statement Analysis

• Net sales increased by 3.3% compared to Q4 2023, driven by growth in all operating segments.
• Gross profit remained relatively flat with a slight increase of 0.1%.
• Operating income decreased by 6.1% due to a higher increase in selling and administrative expenses (3.9%) compared to gross profit.
• Net income decreased by 10.8% year-over-year, impacted by the decrease in operating income and increase in interest expense.

Balance Sheet Analysis

• Cash and cash equivalents decreased by 14.47%, while short-term investments increased, indicating a shift in liquid asset management.
• Accounts receivable increased by 12.45%, potentially indicating higher sales or changes in payment terms.
• Merchandise inventory decreased by 9.39%, suggesting efficient inventory management or lower inventory levels.
• Total assets increased by 10.49%, reflecting overall growth in the company's asset base.
• Debt increased by 11.43%, while current maturities of long-term debt decreased significantly by 61.54%, suggesting refinancing activities or changes in debt structure.
• Total stockholders' equity increased by 15.19%, indicating improved financial position and retained earnings.

Capital Allocation

CDW's capital allocation strategy prioritizes increasing dividends annually, maintaining a target net leverage ratio of 2.0 to 3.0 times, strategically pursuing M&A to expand capabilities, and returning excess adjusted free cash flow to shareholders through share repurchases. In 2024, CDW increased its dividend by approximately 1%, maintained a net leverage ratio of 2.5x, acquired Mission Cloud Services, and returned 77% of adjusted free cash flow to shareholders, exceeding their target range of 50% to 75%. They also announced a $750 million increase to the share repurchase authorization for 2025 and beyond.

Management Commentary

Team delivered a solid finish to a challenging year, demonstrating our clear commitment to our customers during this period of uneven market conditions.

While customers remained cautious, several end-markets displayed signs of stability in the quarter and we delivered strong gross margin and excellent cash flow.

Our ability to optimize cash flow generation through effective management of our working capital enabled flexibility across our capital priorities - as seen by our M&A activity, share repurchases, and dividend increase.

Customers remained cautious and we are taking that into account as we think about our outlook and being very prudent, particularly with everything that's happening in the environment. It's unclear what's going to happen with inflation. Clearly, interest rates is an issue out there. And then just add all the policy uncertainty and impact downstream impact uncertainty, I think we're going to see small businesses continue to be cautious.

Overall Sentiment: Cautiously optimistic. Management acknowledges a challenging year and cautious customer behavior but highlights positive signs of stability in some markets, strong gross margins, and effective cash flow management. They are focused on navigating the uncertain macroeconomic environment while executing their strategy and prioritizing customer needs.

Recommendation

Rating: Hold

Reason for Rating: Given the mixed financial performance in Q4 2024 and FY 2024, and the cautious outlook for 2025, a 'Hold' recommendation is appropriate. While CDW shows resilience in gross margins and strong cash flow, the decrease in net income and cautious customer sentiment suggest near-term headwinds. The company's strategic investments and capital allocation approach are positive, but the uncertain macroeconomic conditions warrant a neutral stance.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 9:18:22 AM