The stock of CDW (NAS: CDW, 30 years Financials) appears to be significantly overvalued, according to the calculation of GuruFocus Value. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, past business growth, and analysts’ estimates of future business performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 166.48 per share and market cap of $ 23.3 billion, CDW stock is showing all signs of significant overvaluation. The GF value for CDW is shown in the table below.
Given that CDW is significantly overvalued, the long-term return on its stock is likely to be much lower than the future growth of its business, which has averaged 10.8% over the past three years and is expected to grow by 6. 64% per year over the next three to five years. .
Link: These companies can offer higher future returns with reduced risk.
Since investing in companies with poor financial strength could result in a permanent loss of capital, investors should carefully consider the financial strength of a company before deciding whether or not to buy shares. Examining the cash-to-debt ratio and interest coverage can provide a good initial perspective on the financial strength of the business. CDW has a cash-to-debt ratio of 0.20, which ranks in the bottom 10% of companies in the software industry. On this basis, GuruFocus ranks CDW’s financial strength at 5 out of 10, suggesting a fair track record. Here is CDW’s debt and cash flow over the past few years:
Investing in profitable businesses carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a business with high profit margins offers better performance potential than a business with low profit margins. CDW has been profitable 10 years in the past 10 years. In the past 12 months, the company had revenue of $ 18.9 billion and profit of $ 5.92 per share. Its operating margin of 6.64% in the mid-range of software industry companies. Overall, GuruFocus ranks CDW’s profitability as strong. Here is CDW’s sales and net income for the past few years:
Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely tied to the long-term performance of a company’s stocks. The faster a company grows, the more likely it is to create shareholder value, especially if the growth is profitable. CDW’s 3-year average annual revenue growth rate is 10.8%, which is in line with the average for companies in the software industry. The 3-year average EBITDA growth rate is 17.3%, which is in line with the average for companies in the software industry.
Another way to determine a company’s profitability is to compare its return on invested capital to the weighted average cost of capital. Return on Invested Capital (ROIC) measures how well a business 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 should pay on average to all of its security holders to finance its assets. When the ROIC is higher than the WACC, it implies that the company creates value for the shareholders. Over the past 12 months, CDW’s return on invested capital is 17.95 and its cost of capital is 7.11. CDW’s historical ROIC vs WACC comparison is shown below:
In summary, the CDW stock (NAS: CDW, 30-year financial data) is estimated to be significantly overvalued. The company’s financial position is fair and its profitability is solid. Its growth is in the mid-range of companies in the software industry. To learn more about CDW’s stock, you can view its 30-year financial data here.
To find out about high-quality companies that can deliver above-average returns, please see GuruFocus High Quality Low Capex Screener.