CDW Corporation (NASDAQ:CDW), with a price-to-earnings (P/E) ratio of 28.7x, is currently trading at a significant premium compared to the average US company. While a P/E ratio below 18x is common, and even ratios under 10x are not unusual, CDW's high valuation may be cause for concern.
However, it's important to consider the context. CDW has been performing well in recent years, bucking the trend of declining earnings seen in many other companies. This strong performance has led investors to believe in the company's continued success, fueling their willingness to pay a premium for its shares.
Examining CDW's Earnings Growth
CDW's P/E ratio can be justified if the company can demonstrate exceptional growth exceeding the broader market. While CDW's bottom line remained relatively flat compared to the previous year, its earnings per share (EPS) have climbed by 35% over the past three years, excluding the last 12 months. This indicates a strong earnings growth trajectory for the company.
Analysts predict CDW's EPS to rise by 10% annually over the next three years. This growth rate aligns with the market's projected growth rate of 10% per year. However, despite this decent growth outlook, CDW's high P/E ratio compared to the market suggests that investors are placing a significant premium on the stock, potentially overlooking the relatively average growth expectations.
The Risks of a High P/E
While a high P/E ratio can reflect investor confidence, it also carries inherent risks. If CDW fails to meet these expectations, its share price could fall, leading to a decline in the P/E ratio. This could result in losses for existing shareholders and discourage potential investors from paying a premium for the stock.
Conclusion: Weighing the Pros and Cons
CDW's high P/E ratio reflects investor confidence in the company's future performance. However, it's crucial to acknowledge that this high valuation carries risks if the company fails to deliver on its growth expectations. It's important for investors to consider both the potential for future growth and the potential risks associated with a high P/E ratio before making investment decisions.
Additional Considerations
Risks: It's always prudent to consider potential risks before investing. For instance, CDW has one warning sign that investors should be aware of.
Alternatives: Investors seeking stocks with lower P/E ratios and proven earnings growth can explore a free list of companies that fit this criteria.
Disclaimer: This article is for general informational purposes only and should not be considered as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your individual financial circumstances. Always consult with a qualified financial professional before making any investment decisions.