CDW (Nasdaq: CDWC) went public in the spring of 1993 and has risen 47
times in value since then, returning 38% per year for its owners. Though I
missed that run, I’m determined not to miss any more of it!
Founded by Michael Krasny in 1984 with an emphasis on great service, CDW — 22
years later — is now a direct marketing distributor of name-brand products from
companies like Microsoft, Apple, Hewlett- Packard, Sony, IBM, and Cisco. Your
business may have even purchased computers and peripherals from CDW. The company
generates more than $6 billion in revenues, selling over 100,000 technology
products and services to more than 300,000 different customers (primarily small-
to medium-sized businesses).
At the turn of the century, two temporary trends torpedoed the stock. The
technology boom fizzled and, simultaneously, investors began to worry very
seriously that Internet retailers would eventually supplant CDW’s high-touch
approach (the company has a sales force that regularly contacts its customers to
talk through the latest upgrades). CDW stock fell 70%, from $85 to $25.
But the reports of its demise were greatly exaggerated. CDW has enjoyed rapidly
rising sales and improving margins over the past five years. Technology devices
and services have only become more relevant — which I expect to continue for
decades. And CDW’s approach (summed up by Krasny: “People like to do business
with people they like.”) has won permanent converts, helping to stave off online
price wars and the threat of direct selling by its suppliers. Even with the
bashing of its stock, the company has, for each of the past six years, earned
top rankings from Fortune as one of the best places to work in the United
States.
CDW closed out 2005 with $6.3 billion in sales and around $250 million in owner
earnings (with capital expenditures normalized over the past five years). The
company’s balance sheet sparkles, with $570 million in cash, no debt, and very
rapid turns of inventory. Rates of return on equity (22%), assets (16.5%), and
invested capital (21%) are astonishingly high. This is simply a beautifully run
business, and yet it’s selling today for less than one times sales.
You might wonder why this business is run so effectively, when so many other
organizations flourish for a few years in the public markets and then sputter.
Well, CDW’s founder still owns 20% of the business (equal to about $1 billion).
Cast your eyes through American commercial history and you’ll find that the
nation’s enduringly great organizations had an ownership culture driven by a
founder with a large financial and reputational stake in the company — Warren
Buffett at Berkshire Hathaway, Bill Gates at Microsoft, Sam Walton at Wal-Mart,
Michael Dell at Dell, and on and on. I suggest to you that Krasny and CDW will
be added to that list over the next 10 to 20 years.
My valuation work makes note of two interesting factors. First, CDW does 99% of
its sales in the continental United States today (the other 1% comes from its
Canadian subsidiary, which was acquired in 2003). The rest of the world will
need a first-class technology reseller in the future, and I see no one
positioned as well as CDW to fill that need. Second, the company’s stock has
fallen 25% over the past couple of years, bringing its valuation down to where
it offers what I consider a wide margin of safety for long-term investors.
I conservatively estimate a 15% growth rate in earnings. Given the light
dilution, our assumptions lead to a five-year valuation above $11 billion for
CDW, translating to returns of 20% per year for us.
The greatest risk is that CDW’s top vendors might concentrate all future efforts
on selling their wares directly over the Internet. But given this company’s
inroads into small business, its superb customer care, its first-rate inventory
management, and the sheer size of its customer base (its five largest buyers
make up only 1% of total sales), I just don’t see that happening. And any
cyclical industry downturn will be but a temporary concern.
The bottom line here is the future: Five to 10 years forward, I’m quite
confident in CDW’s market-beating success.
