On Monday, JPMorgan adjusted its stance on CDW Corporation (NASDAQ:CDW), moving from an Overweight to a Neutral rating and reducing the price target to $235 from the previous $260.
The reassessment comes as a result of anticipated challenges for CDW to maintain its premium valuation amid ongoing headwinds in Enterprise spending, which are expected to continue affecting earnings per share (EPS) growth.
According to the analyst from JPMorgan, CDW has encountered a period of stagnant earnings growth in 2023, and the outlook for 2024 remains flat due to persistent market challenges. This performance marks a departure from the consistent earnings growth CDW has delivered over the past decade.
The anticipated sluggish recovery in Enterprise IT spending into 2025 is likely to constrain CDW's ability to replicate the impressive EPS compound annual growth rate (CAGR) of +19% achieved between 2014 and 2022.
Expectations of a rebound in Enterprise IT spending over the next twelve months are in place, but the pace of this recovery is expected to be slow. This slow recovery is predicted to result in earnings growth falling below the double-digit range investors have historically seen from CDW.
The analyst forecasts that this situation will dampen interest in CDW shares, as slower Enterprise IT spending and potential valuation multiple headwinds could lead to an earnings outlook that lags behind historical growth rates.
Looking ahead to the third and fourth quarters of the current fiscal year, the analyst anticipates that CDW's revenue and earnings will likely fall short of consensus expectations.
This outlook has prompted a revision of the earnings forecast for 2024, with projections now indicating a slight year-over-year decline instead of the previously guided flat to low-single digit growth.
This revised forecast and the expectation of a modest upside from current levels have informed the decision to lower the price target and downgrade the stock rating.
InvestingPro Insights
Recent data from InvestingPro adds context to JPMorgan's reassessment of CDW Corporation. The company's P/E ratio of 26.38 and P/E Ratio (Adjusted) of 25.4 for the last twelve months as of Q2 2024 suggest a relatively high valuation, aligning with JPMorgan's concerns about maintaining a premium valuation. This is further emphasized by the PEG ratio of 6.8, indicating that the stock might be overvalued relative to its growth prospects.
InvestingPro Tips highlight that CDW is "Trading at a high P/E ratio relative to near-term earnings growth," which corroborates JPMorgan's outlook on the company's future earnings potential. Additionally, CDW "Suffers from weak gross profit margins," with the latest data showing a gross profit margin of 22.1% for the last twelve months as of Q2 2024. This could potentially impact the company's ability to maintain strong earnings growth in the face of market challenges.
On a positive note, CDW has "raised its dividend for 11 consecutive years" and "maintained dividend payments for 12 consecutive years," demonstrating a commitment to shareholder returns despite market fluctuations. The current dividend yield stands at 1.14%, with a dividend growth of 5.08% over the last twelve months as of Q2 2024.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for CDW, providing a deeper understanding of the company's financial health and market position.
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