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CDW's Antidote to the Tech Slump

By Roger O. Crockett A good place to look for clues about what sort of sales to expect from CDW Computer Centers (CDWC) isn't necessarily in Wall Street analysts' reports or even Securities & Exchange Commission filings. It would be better to creep up behind CEO John A. Edwardson's truck at a traffic light.

The license plate on his 2002 metallic-gray Ford Explorer reads "TENBY05" -- vanity plate shorthand for the goal Edwardson has set for the Vernon Hills (Ill.) technology distributor: $10 billion in annual sales by 2005. "We are off to a roaring start," he boasts.

It's a good bet CDW will live up to its leader's vision. Even amid the worst technology spending slump in decades, the company managed to increase sales by 3.1% last year, to nearly $4 billion. While not the sizzling 58% growth CDW accomplished in 2000, it's still better than the negative numbers being turned in by many other providers of info-tech gear.

PERENNIAL STAR. CDW's earnings last year were $169 million, up 4%, and it eked out flat earnings of $40.8 million in the first quarter of 2002. The performance was sweet enough in a sour market to catapult CDW to No. 17 on this year's BusinessWeek IT 100, from 43 last year.

CDW is a perennial star that's showing no signs of dimming. Earnings are expected to grow about 5% this year, according to Thomson Financial/First Call. In the next five years, average annual earnings growth should rebound to nearly 25%, analysts forecast. And that's par for CDW's course.

Profits have increased by an average of 30% annually over the past five years. That's why the stock still trades at a relatively high price-earnings ratio of 22. Shareholder return was 30.8% in 2001, ranking CDW 38th on the IT 100 list.

THE MAIN INGREDIENT. There's no doubt, however, that success is a challenge these days. Analyst Bruce Simpson of William Blair & Co. expects sales to climb 6% this year, and 10% in 2003. "It's no longer the blow-and-go days, when goods were flying off the shelf," he says. "Now, you have to work a lot harder to keep growing."

CDW shares have slipped about 16% since early January, closing at $43.91 on June 25. Still, the outlook remains positive. Raymond James analyst Brian Alexander has a buy rating on CDW, with a price target of $60 per share. He's betting that CDW will achieve growth rates of 15% to 20% over the next three to five years-- more than double those of IT industry forecasts. "It won't grow as fast as it used to," Alexander says. "But it will outperform most of the peers."

How will CDW keep cooking? The main ingredient is an unrelenting focus on future growth. Its philosophy of keeping a lens always trained forward was brought by Edwardson, a veteran of giant companies such as Ameritech and United Airlines, who joined CDW in January, 2001. "Historically, we've done well, but that's partly because the market had been doing so well," says Harry J. Harczak, executive vice-president for sales. "He has us thinking past tomorrow."

SUN POWER. Even before the slump, Edwardson encouraged CDW's sales team to continue pushing beyond its traditional hardware sales, into software. As the tech downturn hit full-bore during 2001, customers had more hardware than they needed and were allocating increasing amounts of their budget to software purchases. That's when Edwardson used his corporate clout to cement CDW's new relationship with software standout Sun Microsystems. CDW already does approximately $1 million a month in Sun sales, Harczak says.

Also key to CDW's strategy is to continue expanding its customer base. The company emerged in 1982, the product of Michael Krasny's brainstorm: He placed a $3 classified ad to sell his PC, which eventually led to CDW, now a distributor of major tech brands -- including IBM, Microsoft, Sony, Hewlett-Packard, and Compaq. Edwardson wants to land several new customers each year. Recently, build-to-order computer maker Micron was added to its list, giving CDW a lineup of products that helps it better compete with kingpin Dell Computer.

Where CDW doesn't have expertise, Edwardson plans to buy it. He expects to make a few "bite-sized" acquisitions over the next couple of years that should help fill strategic gaps -- such as a dearth of big servers and no overseas presence.

HP-COMPAQ PULLBACK? Despite the rosy picture for CDW, one big risk looms. Two of its biggest sources of revenue, HP and Compaq (each making up more than 10% of sales), have merged. The new PC behemoth could reassess how much business it does with distributors like CDW, says William Blair's Simpson.

Edwardson is doing everything he can to prevent a slowdown in business. He says he has worked closely with HP-Compaq and has received a detailed blueprint of its products, which still fit nicely into CDW's lineup. He also says revenue from HP-Compaq sales so far hasn't deteriorated. "We are their biggest direct marketer," he says. "And given the fact that we have been growing revenue when most have not, we expect to keep a pretty good relationship."

With partners like that in place, reaching "TENBY05" might just be doable. Crockett is a BusinessWeek writer based in the Chicago bureau

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