- By GF Value
The stock of CDW (NAS:CDW, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $166.48 per share and the market cap of $23.3 billion, CDW stock shows every sign of being significantly overvalued. GF Value for CDW is shown in the chart below.
Because CDW is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.8% over the past three years and is estimated to grow 6.64% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. CDW has a cash-to-debt ratio of 0.20, which ranks in the bottom 10% of the companies in Software industry. Based on this, GuruFocus ranks CDW's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of CDW over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. CDW has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $18.9 billion and earnings of $5.92 a share. Its operating margin of 6.64% in the middle range of the companies in Software industry. Overall, GuruFocus ranks CDW's profitability as strong. This is the revenue and net income of CDW over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of CDW is 10.8%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 17.3%, which ranks in the middle range of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, CDW's return on invested capital is 17.95, and its cost of capital is 7.11. The historical ROIC vs WACC comparison of CDW is shown below:
In summary, The stock of CDW (NAS:CDW, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about CDW stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.