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Why Is CDW (CDW) Down 4.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for CDW (CDW - Free Report) . Shares have lost about 4.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CDW due for a breakout? 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 catalysts.

CDW Q1 Earnings Surpass Estimates

CDW first-quarter 2019 non-GAAP earnings per share rose 18.2% year over year to $1.24 and also beat the Zacks Consensus Estimate of $1.10.

Revenues in the reported quarter totaled $3.96 billion, marking a year-over-year rise of 9.7% and also topping the Zacks Consensus Estimate of $3.77 billion. Moreover, revenues were up 12.4% at constant currency (cc).

The company’s balanced portfolio of customer end-markets and the breadth of its product and solutions pipeline are key drivers. Results also include two months of Scalar, which performed in line with the company’s expectations.

Quarter in Detail

CDW’s net sales of $1.74 billion registered nearly 12.6% growth on a year-over-year basis. This upside was driven by double-digit growth in both transactions and solutions. During the quarter under review, client devices increased more than 20%.

Small Business segment’s net sales of $356 million increased 10.3% year over year. Sales growth was primarily driven by a double-digit rise in transactions and high-single digit growth in solutions. Also, client device augmented approximately 20% in the reported quarter. Plus 50% surge in software-as-a service is a tailwind this quarter under review.
 
Coming to Public segment, net sales of $1.3 billion climbed 9.9% from the year-earlier quarter. Moreover, revenues from Government, Healthcare customers and Education customers were up 18.6%, 8.4% and 2.4%, respectively. Despite the government shutdown, the government channel delivered a strong performance.

Net sales in Other ascended 12.6% to $536 million. Other segment comprises the outcomes of the company’s Canadian and UK operations.

Moreover, CDW witnessed a solid uptick across hardware, software and services. Hardware grew 10% while software and Services were up 18% and 16%, each.

Margins

CDW’s gross profit of $672 million increased 11.3% on a year-over-year basis. Gross margin expanded 30 basis points (bps) to 17%, driven by a product margin improvement.

Non-GAAP operating income increased 10.7% to $287 million. Non-operating margin expanded 10 bps to 7.3%

Balance Sheet and Cash Flow

CDW exited the reported quarter with cash and cash equivalents of $285 million compared with $205.8 million at the end of the earlier reported quarter.

The company has a long-term debt of $3.26 billion, up from $3.18 billion in the sequential quarter.

It generated $252.4 million of cash flow from operational activities in the quarter under review. Free cash flow was $303 million during the same time frame.

In first-quarter 2019, the company returned $220 million of cash to shareholders including $43 million of dividends and $177 million of share repurchases.

Guidance

CDW anticipates 2019 revenues to grow 300-375 bps (earlier 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 still projected in the mid 7% range. Non-GAAP earnings per share growth rate at constant currency is predicted in the range of 11-12%, more than the previous expectation of 10%. Currency headwind of 50 bps (earlier 60 bps) is likely to be an overhang on the company’s revenues as well as EPS.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, CDW has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, CDW has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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