A month has gone by since the last earnings report for CDW (CDW - Free Report) . Shares have added about 1.3% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is CDW due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
CDW Reports Solid Q4 Results
CDW's fourth-quarter 2018 non-GAAP earnings per share surged 34.4% year over year to $1.32 and also beat the Zacks Consensus Estimate of $1.20.
Solid growth in earnings was driven by a strong economy, healthy employment and a lower tax rate. However, currency headwinds affected earnings growth by 40 basis points (bps).
Revenues for the reported quarter came in at $4.08 billion, marking a year-over-year rise of 8.6% and also topping the Zacks Consensus Estimate of $4.03 million. Moreover, revenues were up 9% at constant currency (cc).
The company’s balanced portfolio of customer end-markets, the breadth of its product and solutions pipeline and ongoing execution of its three-part strategy are key growth drivers. However, the currency moved to a headwind of 40 bps in the fourth quarter from a tailwind of 70 bps in the year-ago period.
Quarter in Detail
CDW’s Corporate’s net sales of $1.8 billion registered nearly 14.8% growth on a year-over-year basis. This upside was driven by significant customer demand for client devices, which was backed by strong economic growth and optimal employment levels. During the quarter under review, client devices increased more than 25%. Moreover, double-digit digit growth in Corporate solution sales was a tailwind. Server, storage and NetComm were key growth analysts.
Small Business segment’s net sales of $363 million increased 17.7% year over year. Sales growth was primarily driven by double-digit growth in transactions and solutions.
Coming to Public segment, net sales of $1.4 billion dipped 0.8% from the year-earlier quarter as revenues from Government decreased 11.9% to $546 million with federal service revenues declining in the high-teens. The tough year-over-year comparison that the company has been persistently facing due to the Department of Defense’s Windows 10 upgrade in the prior year is a dampener. However, Education sales rose 7.6% to $425 million and net sales to Healthcare customers climbed 7.8% to $443.2 million.
Net sales in Other ascended 10.3% to $461.7 million. Other segment comprises the outcomes of the company’s Canadian and UK operations. U.K. was up by high teens, driven by strong customer demand for both datacenter and client devices. Canada rose in high single-digits with solutions growth continuing to outpace that of transactions.
Moreover, CDW witnessed strong growth across hardware, software and services. Both hardware and software augmented 8% each while Services jumped more than 20%.
CDW’s gross profit of $694 million increased 13.1% on a year-over-year basis. However, gross margin of 17% expanded 60 basis points (bps) year over year, backed by mix of software-as-a-service, warranties, commission revenues and also product margin.
The company reported adjusted EBITDA of $323 million, which improved 8.8% from the prior-year quarter. Adjusted EBITDA margin was flat year over year at 7.9%.
Balance Sheet and Cash Flow
CDW exited the reported quarter with cash and cash equivalents of $205.8 million compared with $255.1 million at the end of the earlier reported quarter.
The company has a long-term debt of $3.18 billion.
It generated $905.9 million of cash flow from operational activities during 2018. Free cash flow was $752 million during the same time frame.
Last year, the company returned $660 million of cash to shareholders including $139 million of dividends and $522 million of share repurchases.
The company also announced that the board has ramped up share repurchase authorization by $1 billion and cleared 40 cents hike over last year's dividend.
CDW anticipates 2019 revenues to grow 200-300 bps more than U.S. IT market's expected growth estimate of 3%. The acquisition of Scalar is envisioned to contribute 100 bps additionally.
For 2019, non-GAAP operating income margin is projected in the mid 7% range. Non-GAAP earnings per share growth rate at constant currency is predicted to be 10%. Currency headwind of 60 bps is likely to be an overhang on both revenues and EPS.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
At this time, CDW has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
CDW has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.