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Why CDW Corporation Stock Just Tumbled 13%

Motley Fool - Wed Apr 19, 2023

What happened

Shares of CDW Corporation (NASDAQ: CDW) are down 13.3% Wednesday morning after the IT hardware and software distributor preannounced Q1 2023 sales numbers that fell far short of analyst predictions.

Heading into the quarter -- where official results are due out before market open on May 3 -- analysts had been forecasting nearly $5.4 billion in sales for CDW (according to Yahoo! Finance figures), and flat earnings of $2.20 per share. But this morning, CDW warned that sales will actually be closer to $5.1 billion for the quarter, and that profits for the full year will be "modestly below" 2022 numbers.

So what

How much lower? CDW hasn't said just yet.

CEO Christine Leahy noted that "intensifying economic uncertainty ... led our customers to spend more cautiously," with cutbacks being "most acute with our largest commercial customers." Now, the good news is that Leahy says CDW was able to maintain strong gross profit margins during the quarter because of favorable product mix. But the bad news is that there will be less revenue to apply these strong gross profit margins to, and that operating profit margins are looking weaker than anticipated.

That all seems to imply that earnings for the quarter could miss Wall Street's $2.20 estimate -- and that full-year earnings will fall short of last year's $8.13-per-share net profit.

Now what

Granted, this isn't a problem limited to CDW. To the contrary, CDW management is forecasting that the entire US IT industry will shrink "at a high single-digit rate in 2023" -- and predicts CDW will gain market share in this contracting environment, outperforming on sales growth by as much as 2% or 3% relative to the rest of the industry.

Granted, too, if CDW's full-year miss isn't too huge -- say, still in the $8-per-share range -- this would leave the stock priced at not much more than 20 times current-year earnings, which isn't particularly expensive if CDW can resume growing strongly again soon. Then again, though, analysts are forecasting only about 13% annualized earnings growth for CDW over the next five years.

For a 20-times-earnings stock, that may be too slow to justify a buy rating, especially at the start of a "down" year for profits.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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