CDW's 2025 Earnings Show Steady Growth but Margin and Leverage Concerns Persist

What happened

CDW Corporation reported fourth quarter and full-year 2025 earnings, with net sales increasing 6.3% year-over-year in Q4 and 6.8% for the full year, indicating a continuation of mid-single-digit growth. Gross profit margins improved slightly to 22.8% in Q4, but annual margins dipped, reflecting ongoing profitability pressures despite revenue expansion. This performance aligns with the DeepValue report's concerns about CDW undergrowing the broader IT services sector, suggesting persistent competitive headwinds. Operating income rose 5.4% in Q4, yet the leveraged balance sheet at ~2.9x net debt/EBITDA and DOJ E-Rate investigation overhang remain significant risks. Overall, the earnings reinforce CDW's position as a cash-generative but fully valued business, with no clear catalyst to alter the cautious investment stance.

Implication

Investors should recognize that CDW's revenue growth, while steady, continues to lag sector IT spending, indicating potential share loss or mix issues in a hardware-heavy portfolio. The mixed margin performance highlights cost pressures and the need for a successful shift to higher-margin services and cloud offerings. With leverage at ~2.9x net debt/EBITDA and the DOJ investigation unresolved, downside risks persist, limiting margin of safety. The stock trades ~24% above a conservative DCF estimate, suggesting quality is already priced in, and further upside requires clearer evidence of margin stabilization or debt reduction. Monitoring quarterly results for improvements in organic growth and operating margins is essential before considering a more bullish position.

Thesis delta

The new earnings data does not materially shift the investment thesis; CDW remains a high-quality, cash-generative franchise with growth and margin challenges that keep the risk/reward balanced. However, the slight margin improvement in Q4 could hint at early stabilization, but sustained evidence and resolution of regulatory overhangs are needed to upgrade from a WAIT stance.