#82

CDW

Recommended

Downgraded by Bear Stearns from Outperform to Peer Perform

CDW (CDWD) is a distributor of name brand computer hardware and software to small and medium sized businesses. The company differentiates itself from competitors by offering a high level of customer service. The company has over 2,100 account managers, many of whom are certified technical sales specialists who can help customers solve their technology issues. The sales force is well trained, the company stocks over 120,000 products and the company offers overnight shipping all in an effort to provide high levels of service and support.

CDW is an exceptionally well-managed company in all respects. One of the things that makes CDW really unique for a technology distributor is that it actually generates significant and consistent free cash flow. Most technology distributors such as Ingram Micro (IM) and Scan Source (SCSC) don't generate much cash flow, and if they do, it's very volatile and difficult to forecast. However, CDW has been generating an average $181 MN yearly free cash flow since 2000. In addition to the strong cash flow, the company has posted very high returns on equity, which have averaged well above 25%.

growth has recently picked up which is driving the shares higher. The most recent quarter, in which revenues grew 17% and EPS grew 27%, continued the pace of acceleration which began in the middle of last year. In addition, CDW finally showed some gross margin expansion. The company raised its gross margins estimates which should help earnings grow faster than sales. One of the main knocks against the company is its inability to get earnings leverage. However, with the majority of the company's investments behind it, I believe margins can begin expanding.

The strong growth has reignited the shares but the stock is still attractively valued. I believe that EPS can approach $5.00 in 2009. CDWC has traded at a median 21x forward earnings multiple. Therefore, I believe CDWC can trade over $100 by next year. In addition, CDWC is trading at the low end of its historical price to sales multiples. If you assume CDWC trades at its median price to sales multiple of 1.1x, then the stock should be valued above $100 in 2008, as well.

sonys friend

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Upgraded by Bear Stearns from Peer Perform to Outperform

Downgraded by Matrix Research from Buy to Hold

#2 Tom