In this piece, we will take a look at 5 stocks to invest in according to Thomas Bancroft’s Makaira Partners. If you want to take a look at Mr. Bancroft’s profile and other stocks in his portfolio, head on over to 10 Stocks to Invest in According to Thomas Bancroft’s Makaira Partners.
5. CDW Corporation (NASDAQ:CDW)
Makaira Partners’ Holdings: $52 million
Makaira Partners’ Portfolio: 11.11%
Number of Hedge Fund Holders: 37
CDW Corporation (NASDAQ:CDW) provides hardware and software products to businesses, governments, and other non-consumer entities in North America and the U.K. It is headquartered in Lincolnshire, Illinois.
Mr. Bancroft’s investment firm held 288,982 CDW Corporation (NASDAQ:CDW) shares as of Q3 2021, which were worth $52 million and represented 11% of its portfolio. During the same time period, 37 of the 867 hedge funds polled by Insider Monkey had held stakes in the firm.
CDW Corporation (NASDAQ:CDW) brought in $5.3 billion in revenue and $2.13 in non-GAAP EPS for its third quarter, pleasing Wall Street by beating estimates on both counts. Morgan Stanley reduced the company’s price target to $196 in an October 2021 analyst note, highlighting that the IT hardware segment is facing several headwinds such as supply chain constraints.
CDW Corporation (NASDAQ:CDW)’s largest investor is Robert Joseph Caruso’s Select Equity Group which owns 6.8 million shares worth $1.2 billion.
CDW Corporation (NASDAQ:CDW) was mentioned by Wedgewood Partners in its Q2 2021 investor letter. The firm believes that:
“We have owned CDW stock for nearly two years now, and we have been quite pleased to see our thesis playing out as expected – even with the completely unexpected trauma of the pandemic fireworks during our holding period. These are the key components of our investment thesis, in simplistic form: First, the IT distribution and consulting industry is an attractive place to invest, with secular growth above that of the broad economy. Second, we expect the Company to continue to take share within the IT distribution and consulting industry, growing faster than the industry while continuing to improve margins and returns. The pandemic emerged shortly after our purchase, but even that did not alter the favorable dynamics underlying our thesis, as you can see below.
So, even in a negative year for total economic growth, IT spending in the U.S. came in better than the broad economy. The Company outperformed the industry and with improved profitability – which always be stills our hearts. Additionally, consulting the chart below, you can see that the gap between its growth and the industry’s growth continues to widen over time, and that spread continued to expand during the abnormal conditions in 2020 as well. All of this gives us even greater comfort in our initial thesis.
More important, it is clear to us that the pandemic has created even greater long-term opportunities for the company (and as it did for PayPal) and has accelerated several secular trends that already had been beneficial for the Company. Growth areas prior to the pandemic, such as network design and cloud-related services including security, storage, and software-as-a-service, will now accelerate meaningfully, driven by the necessary duplication of resources and the increasing complexity of technology resources deployed in use-cases such as employees working remotely, healthcare delivered virtually, or education delivered flexibly. We see several persistent secular drivers emerging:
• Upgrades to the highest tier of devices outside of the primary/traditional location – if you suddenly are conducting many of your client meetings via Zoom, for example, or if you’re a physician providing video appointments to your clients, you now need to have the same high-caliber device with you at all times that you perhaps used to have only in your primary location.
• This requires not only a duplication in areas such as network design and security, of course, but upgrades to the highest tiers of each. If a company’s technology resources, patients’ health data, or students’ personal information are always present in all locations with all users, the highest tiers of devices, network, software, security, and storage must also be always present in all locations. Previously, this highest tier of all components was limited to the primary office or clinic or school building.
• We note that security has been a key growth area for both revenue and profit over the last several years, with revenue growth and margins better than the corporate average. This proliferation of devices and locations, with all the network complexity that goes with it, is particularly beneficial for the Company.
• Additionally, while a customer’s primary physical location might have been able to handle all these technology resources using on premise servers prior to the pandemic, when most ofthe resources were not being used remotely, the Company’s customers now have little choice but to use the cloud for this sudden proliferation of devices and their related network, storage and security needs.
• With greater demand emerging across the industry for the foreseeable future, distributor scale and the resulting reliability of a distributor’s supply chain will be vitally important, so we believe the larger players will continue to win share from smaller distributors. In its most recent quarterly earnings call, management highlighted that lead times from its technology vendors were extending in many areas, although it has been able to procure all products needed by its customers. If a company of CDW’s scale is seeing some impact, there are many, many smaller vendors that are struggling to get their hands on product
at all, or that can only do so with lengthy delays.It is worth remembering that CDW tends to focus on smaller and less sophisticated clients than many of its public company peers in the industry. Its corporate focus is on smaller companies with important client bases in education, government, and healthcare. The majority of these clients do not have large internal technology departments that can handle massive, sophisticated projects, such as trying to figure out – basically overnight when a pandemic struck – the best way to design their device, network, software, storage, and security needs so that their entire workforce can work remotely.
When the pandemic first hit, there really was no planning at all. The mad scramble was on 24/7/365 for basic needs: laptops for corporate employees working from home, or Chromebooks for virtual education. As time has passed, and as IT managers across all areas of the economy start to adjust to post-pandemic realities, CDW is starting to see its customers turn to longer-term planning, contemplating all of the duplication of resources and complexities we laid out above. In our client letter in the 3rd quarter of 2019, at the time we purchased CDW, we pointed out that “the Company has outgrown many of its peers over the last several years by focusing on hiring engineers and specialists focused on creating solutions for its customers, rather than focusing on salespeople. This has allowed CDW to tap into booming areas of tech such as helping smaller organizations plan their cloud and digital workplace transitions.” This multi-year investment is now paying even greater dividends in the COVID era, as customers of all kinds have had to adapt to the new realities at a frantic pace.
Finally, we believe a variety of smaller competitors, many of which may have expertise or customer relationships that could be useful to CDW, likely struggled during 2020 – particularly so if these competitors had narrow exposure to customer groups that were harder hit than others. Additionally, supply chain bottlenecks and product shortages across the industry will have hurt (and will continue to hurt for the intermediate-term future) smaller vendors much more than larger vendors. Therefore, we believe CDW may have more opportunity than usual to supplement its near-term growth with attractive acquisition
opportunities. We note further that the Company currently is underleveraged in comparison to its long-term balance sheet targets. Particularly with historically low levels of interest rates at the moment, we see the potential for the company to put the strength of its balance sheet to work, whether that happens through acquisitions, higher levels of share repurchases, or perhaps even some form of recapitalization.For a long stretch in 2020, we scratched our heads as the market fixated upon only a small portion of its customer base (primarily government and education) that had seen tremendous growth during the pandemic, as these essential service providers scrambled to enable their employees to provide those services in a virtual environment. Corporate customers also participated in this scramble, to a lesser degree, while larger projects were put on hold. The market seemed to see this as nothing but a short-term windfall and dismissed it. Investors were quite slow to identify the longer-term benefits caused by the pandemic, some of which can be considered an acceleration or augmentation of trends that were going to happen anyway, but many of which – particularly when it comes to areas such as remote work, virtual healthcare services, and virtual educational opportunities – could be considered gifts that never were expected to be meaningful contributors to CDW’s business model. Even after a belated and justified rally in the stock finally arrived toward the end of last year, we would note that CDW’s valuation metrics are only touching previous prepandemic highs. More still, valuation is quite reasonable in comparison to the broader market. With the market’s growth and return metrics inferior to CDW, the stock has blown right through pre pandemic highs and is nearly holding on to those even higher peak levels. Furthermore, we see consensus estimates for CDW in 2022 (especially) and in 2023 as too low, making the stock look even more attractive. We took several opportunities to add to our position last year at attractive prices and remain bullish on the Company’s prospects.”
