CDW Corp

CDW is a leading provider of products and solutions in the information technology (IT) industry in North America and the U.K. However, we divested CDW to fund larger investments in several high-quality businesses that are not AI sensitive and trading below our assessed fair value. The implications of AI are significant for CDW, as clients may spend less on the products and solutions sold by CDW and more on AI-centric solutions. This shift in client spending and the subdued market conditions led us to conclude that CDW does not present a compelling investment opportunity at this time.

CDW Corp is a tech distributor that provides IP support along with a comprehensive array of hardware and software. Despite a recent sell-off of 27% after reporting in-line earnings, the stock is now viewed as undervalued, having been purchased at less than 10x earnings. The manager believes the market has overshot in viewing CDW's software distribution as a commodity. Since the purchase, the stock has rebounded approximately 35%, indicating a positive outlook for its performance moving forward.

We divested CDW to fund larger investments in several high-quality businesses that are not AI sensitive and trading below our assessed fair value. The implications for CDW are second-order – for example, clients may spend less on the products and solutions sold by CDW and more on AI-centric solutions. This reflects our view that the competitive landscape is changing, and we believe that CDW may face challenges in maintaining its market position as AI continues to evolve.

I added to CDW Corp (CDW). CDW is the best-in-class value-added reseller of IT products, and recent product mix shifts towards more hardware (because of demand for AI) has driven margins lower and has highlighted potential for reduced software spend over time, where margins are much higher. CDW has a reputation for serving all sizes of customers as well as education and government customers, all constituencies which are slow to adopt new technology. I think at 11x FCF CDW is well-positioned to generate significant current return through a 2.5% dividend yield and significant share repurchases that could reduce shares outstanding by 20% in only a few years. CDW generally does not require significant capital to grow, so I think the assumption of meaningful capital return is relatively safe, assuming management does not engage in value-destroying acquisitions.

We added to our exposure of CDW, the largest value added reseller of technology products, as we believe the market is incorrectly penalizing its valuation due to fears of AI disruption. Additionally, there are company-specific questions around investments they've been making to broaden out their product portfolio, which we think is likely to pay dividends for shareholders in the future. This presents an exciting opportunity as we believe the weakness in CDW's share price is misplaced.

CDW Corporation is mentioned in the context of the Fund's performance and stock selection, but there is no explicit directional argument made about the company. The letter discusses various companies and their performance without providing a specific thesis on CDW Corporation.

This quarter, we also began building a new position in CDW, a value-added reseller of technology solutions to small and medium-sized enterprises, education and government clients. In 2020, CDW helped clients rapidly adapt their organizations for the challenges of remote work. Five years later, the next hardware cycle will also likely include clients asking CDW specialists how to enable their platforms to take advantage of AI. In both cases, these opportunities are not yet reflected in earnings, but for patient investors we think that creates attractive entry points.

CDW is positioned to benefit as AI value propositions trickle down to small businesses. The Company's revenues grew +10% while adjusted operating income grew just +2%. CDW is instrumental for small businesses that are updating their IT stacks to be more AI-friendly, including moving to the cloud and updating neglected network and edge devices. As these businesses adopt AI solutions, CDW will play a crucial role in implementing these technologies, which we believe will enhance its growth prospects.

CDW Corporation is a value-added reseller of IT hardware and software products to a broad array of small- and medium-sized customers. It partners with over 1,000 vendors to provide more than 100,000 products to its 250,000+ customers. With a dizzying breadth of products and services, CDW benefits from overall technology industry growth, without being heavily exposed to any individual product or technology trend. The company has an excellent track record of gaining share within its highly fragmented markets, which we expect will continue. We also believe many of CDW’s customers have maintained some of their IT hardware assets beyond their useful lives, and expect that there will be a bump in replacement demand in the near future.

CDW Corp. is a value-added reseller of information-technology products to small and medium-sized businesses in the U.S., Canada, and the U.K. The company has a significant competitive advantage as the largest player in its industry, with operating margins at 8.2%, nearly double that of its peers. CDW has consistently outgrown the industry and captured market share, benefiting from a new CEO who improved operational execution, leading to increased margins and cash flow. The stock trades at around 18x forward earnings, which remains attractive for a market leader with a long-lived opportunity to reinvest at high rates of return.