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Company: CDW Corporation.

Exchange: NASDAQ.

Symbol: (NASDAQ:CDW)

Industry: Information Technology (Integrated IT Solutions).

Expected IPO date: June 27, 2013.

(Source)

The Offer:

CDW Corporation is offering 23,250,000 shares of its common stock. The selling stockholders are offering an additional 4,650,000 shares of the company's common stock. The anticipated initial public offering price per share will be between $20 and $23. The underwriters have a 30-day option to purchase up to an additional 4,185,000 shares from the selling stockholders.

Valuations after current offering:

Shares to be outstanding after offering

168,469,728* shares

Offer price (mid range) per share

$21.50**

Valuations at $21.50** per share

$3.62 billion

*without over-allotments.

**The mid-point of the estimated range of the initial public offering price.

Proposed future dividend payouts:

The company is planning to pay the dividend on its common stock from the fourth quarter of 2013, subject to its financial conditions, regulations, etc. The planned dividend, if approved, will be $0.05375 per quarter, or $0.215 per annum.

Summary:

CDW is a Fortune 500 company and is a leading provider of integrated IT solutions in the U.S. and Canada. It also operates as a major U.S. sales channel partner for many OEMs and software publishers. The company does not produce any product or publish any software on its own. It simply resells the hardware and software products to its clients and also provides the associated services like analysis, design, selection, procurement, integration and management.

Currently, it serves more than 250,000 clients and offers them more than 100,000 products from more than 1,000 brands; it provides these products and services to its clients with the help of its sales force and service delivery teams consisting of more than 4,300 coworkers. The company holds the largest market share of its addressable market.

The company currently has five dedicated customer channels:

  • Medium/large business.
  • Small business.
  • Government.
  • Education.
  • Healthcare.

Each of these channels generated over $1 billion in net sales in 2012. The following table provides information regarding its reportable segments and its customer channels.

(click to enlarge)

Products/services:

Hardware products:

Its hardware products include notebooks/mobile devices (including tablets), network communications, enterprise and data storage, video monitors, printers, desktop computers and servers.

Software products:

Its software products include application suites, security, virtualization, operating systems, etc.

Integrated solutions:

The company also provides integrated solutions to its clients.

The integrated solutions offered by the company include:

  • Mobile security solutions.
  • Data/network protection solutions.
  • Solutions related to data center optimization.
  • Solutions related to cloud computing implementation.
  • Virtualization: IT design and implement servers, storage and desktop virtualization solutions for its clients.
  • Client/employ relation management solutions.

The following table shows the net sales by the major categories (based upon the company's internal category classifications)

(click to enlarge)

Financial analysis:

Income statement analysis:

(click to enlarge)

(Q1 FY 2013 data is unaudited)

Key points from the income statement:

  • Its revenues grew at a compounded annual growth rate ("CAGR") of about 7.3%, from $8801.2 million in FY 2010 to $10128.2 million in FY 2012.
  • Its operating margins show a steady rise during the last few years, from 4% in FY 2010 to 5.04% in FY 2012.

(click to enlarge)

Balance sheet analysis:

(click to enlarge)

Key points from the balance sheet:

  • Nearly 64% of the company's assets are in the form of goodwill and intangible assets.
  • Healthy growth in the cash and cash equivalents (green arrow).
  • The inventory levels are under 3.5% of its revenues (good operational metric).
  • The amounts receivable are about 12-13% of its revenues (good operational metric)

The table below shows the company's goodwill and intangible assets as on December 31, 2012.

(click to enlarge)

The Company performed its annual evaluation of goodwill as of December 1, 2012. All reporting units passed the first step of the goodwill evaluation (with the fair value exceeding the carrying value by 49%, 44%, 104% and 17% for the Corporate, Public, Canada and CDW Advanced Services reporting units, respectively).

(Source: IPO prospectus, Page F-18)

Industry outlook:

The company operates in the U.S. and Canadian IT markets, which are the large and mature markets, and are expected to show moderate growth in the future. The major growth is expected to come from, the replacement of the aging infrastructure, and the new technologies like cloud computing, virtualization, mobility, etc.

The table below shows the estimated 2012 annual sales within the IT market and expected growth rate of certain technology solutions that the company provides within its addressable market:

(click to enlarge)

Key positives and negatives points of the company:

Key positives:

1. Largest player in the industry.

2. Huge addressable market (the U.S. and Canada).

The company currently holds just about 5% market share of its total addressable market that exceeds $210 billion for the year ended December 31, 2012. Being the largest player in the industry, the company is capable of increasing its market share, particularly in the segments where the high future growth is expected.

3. Excellent historical performance:

For the last ten years, its performance has been excellent, as it outpaced the economic, as well as the U.S. IT spending, growth rate. Its net sales grew at a compounded annual growth rate ("CAGR") of 9.0%, as compared to CAGR of 4.3% for U.S. IT spending and 1.6% for the U.S. real GDP. (See the chart below)

(click to enlarge)

4. The company generates nearly 50% of its revenues from the integrated solutions; where the margins are high, and the competition is low.

5. Presence in high growth segments:

The company has a presence in most of the high growth segments (technology solutions) of the industry.

Key negatives:

1. Low operating margins.

2. Normal business risks like:

  • Emergence of new competitors with the better products/services.
  • Any adverse change in government regulations, economic slowdown, etc.

Future assumptions: (These are just the assumptions and the company may perform totally different from these assumptions.) The financial and operational assumptions:

Assuming that:

  • Its revenues grow by 6% (below its historical growth rate).
  • Its operating margins grow by 0.15 percentage point. (Due to improving operational metrics and higher revenues)
  • Its interest cost reduced by 10% in FY 13 and further by 5% in FY 14, due to the money raised/generated from this offering as well as from the normal business operations.
  • The applicable tax rate is considered as 35%.

The table below shows the basis of assumptions:

(click to enlarge)

The table below shows the financial assumptions:

(click to enlarge)

In connection with this IPO offering, the company will pay $24.4 million as a one-time termination fee for the termination of a management services agreement, this fee is not included in estimates and will affect the company negatively, whenever accrued.

Peer comparison

Its peers are currently trading at low P/E ratios, though they are much smaller in the size.

Peer comparison

Company

P/E

Market cap. $

Insight Enterprises, Inc. (NASDAQ:NSIT)

10.05

823.40 million

ePlus Inc. (NASDAQ:PLUS)

13.36

470.85 million

PC Connection, Inc. (NASDAQ:PCCC)

12.65

419.46 million

Softchoice Corporation.

14.55

392.68 million

PCM Inc (NASDAQ:PCMI)

16.03

103.04 million

Net proceeds:

The company estimates that the proceeds to it from this offering, after deducting estimated underwriting discounts and commissions and offering expenses payable by the company, will be approximately $467.4 million, assuming the shares offered by the company are sold for $21.50 per share, the midpoint of the price range.

Use of the proceeds:

The company intends to use all of the net proceeds, from this offering for the following objectives:

  • The company will use $443.0 million of the net proceeds to redeem $175.0 million aggregate principal amount of Senior Secured Notes and $239.0 million aggregate principal amount of Senior Subordinated Notes and redemption premium of $14.0 million and $15.0 million, respectively and
  • $17.9 million to pay the accrued and unpaid interest.

Data source: IPO prospectus.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment.

Source: CDW Corporation: Leading Provider Of Integrated IT Solutions