Episode Details

CDW Corporation (CDW) Q2 2026 — Net sales $6,572.2M UP 10.0% beat a ~$6.21B bar and non-GAAP EPS $2.91 beat $2.80. Then the cascade: gross profit +6.3%, operating income +2.0%, gross margin 20.1% vs 20.8%. CDW opened at $115.45, traded to $113.00 (-26.6%), and closed down 9.03% at $140.10. CDW beat on revenue and on earnings - and the stock still closed down 9%. Here is why: revenue grew 10.0%, gross profit grew 6.3%, operating income grew 2.0%. Every step down the income statement the growth halves, because the growth arrived as low-margin hardware that CDW books GROSS while netting down software. And in the same release where the CEO called CDW 'services-led', services net sales grew 1.1%. THE CALL: HOLD (3/5, A GOOD BUSINESS AT AN HONEST PRICE, WITH NO MARGIN OF SAFETY) — base-case value ~$145.0 vs ~$140.1 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$145 vs the $140.10 close (+3%) - within a dollar of the Street's $144 average, and we still DIFFER because they call that a Buy. Base $136 (owner earnings ~$1.15B compounding 5% then 3.5% at an 8.5% discount rate), bear $72 (hardware mix keeps winning, gross margin slides toward 19.5%), bull $198 (services and Geared for Growth land, margin stabilises). Cross-checks: 5x gross profit = $153, 14x non-GAAP EPS = $152. - THE SCREEN MULTIPLE LIES. At $140.10 CDW trades at ~12.9x non-GAAP EPS (~$10.85 FY26E), which looks cheap against its own history. But that figure excludes roughly $255M a year of acquisition-intangible amortisation and ~$100M of stock compensation. On GAAP EPS near $8.45 it is 16.6x - a normal multiple for a distributor with mid-single-digit gross profit growth. On EV of ~$23.2B against ~$4.96B of 2026 gross profit it is 4.7x. - THE REVENUE BEAT WAS A MARGIN DOWNGRADE. Net sales $6,572.2M (+10.0%, +9.9% cc) on 64 selling days, both years. Gross profit $1,319.8M (+6.3%), gross margin 20.1% vs 20.8% - the company's own words: 'mix into and lower margin in certain hardware categories'. SG&A $891.2M (+8.6%) grew faster than gross profit, so operating income was $428.6M (+2.0%) and operating margin fell 7.0% to 6.5%. GAAP EPS $2.15 (+5.1%); GAAP net income +1.2%. - THE MIX MOVED BACKWARD. Hardware net sales +10.4% to $4,905.0M (booked GROSS); software +12.5% to $1,114.3M (much of it netted down); SERVICES +1.1% to $520.7M from $515.2M - 7.9% of net sales versus 8.6%. Government is the cleanest proof: net sales +13.6% to $848.0M while Government gross profit FELL 2.7% to $163.7M, margin -320bp to 19.3%. Commercial $3,965.4M +9.2% (GPM -40bp); Education $933.1M +0.7%; UK/Canada $825.7M +22.9%. - CASH FLOW HALVED WHILE BUYBACKS DOUBLED. 1H26 operating cash flow $219.7M vs $443.1M; free cash flow $165.8M vs $393.7M (-58%); adjusted FCF $278.4M vs $458.9M. Yet CDW spent $544.7M on buybacks (vs $350.1M) plus $160.9M of dividends - $705.6M returned on $278.4M generated. Total debt rose to $5,817.0M, cash fell to $361.8M, net debt $5,455.2M. HONEST REBUTTAL: receivables $7,343.7M (+30.5%) and DSO 93 vs 80 look alarming, but netted-down revenue and multi-year software inflate DSO and DPO together (DPO 77 to 88), so the cash conversion cycle stretched only 16 to 21 days. Guidance was HELD: full-year non-GAAP EPS growth at the high end of high-single-digit. What to watch: UP: services growth back above 5%, gross margin stabilising near 20.5%, or free cash flow conversion recovering in 2H as management expects. BEAR: gross margin below 20% in Q3, another quarter of SG&A growing faster than gross profit, or the full-year EPS guide finally coming down. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.