Why the Dicker Data share price is heading to $4

The share price of IT distribution business Dicker Data Ltd (ASX: DDR) rose 1.4% to a record high of $3.74 in Friday morning trade. This means the Dicker Data share price has now increased 33% in 2019 on the back of 2018 earnings exceeding expectations and bullish guidance for 2019.

Strong result 

The bullish start to 2019 has occurred after the company reported another strong financial result for FY18. For the year ended 31 December 2018, Dicker Data reported revenue growth of 14.4% to $1.49 billion.

The key driver of top-line growth was from existing vendors as existing vendor relationships were leveraged to obtain access to new products or increased share. As a result, the company booked revenue growth of $174.3 million from existing vendors, up 13.4% over the prior period

On a sector basis, growth occurred across all business units with the standout performers being from hardware and software. In FY18, hardware saw revenues rise $129.2 million, up 12.6% over the period, whilst software delivered a $56.8 million rise in revenue, up 20.9% over the prior period.

On the bottom-line, net profit before tax rose by 15.0% to $46.2 million with margins flat at 3.1%. Net profit after tax was up 20.5% to $32.5 million and earnings per share rose 20.2% to 20.22 cents.

FY19 guidance

For FY19, Dicker Data is forecasting group revenue of $1.65 billion and net profit before tax of $51.4 million. This would represent growth of 10.4% and 11.2% over the prior period. The market has reacted positively to guidance with the share price up around 10% since the release of the announcement on Monday.

Furthermore, Dicker Data announced it expects to pay quarterly dividends in FY19 of 5 cents per share fully franked. This would bring the projected dividends in FY19 to 22 cents per share, a 22.2% increase over the 18 cents per share paid in FY18.

Foolish takeaway

At current prices, Dicker Data trades for around 17 times forward earnings and offers income investors a yield of 5.9% that comes attached with full franking credits. The company pays out almost all of its profits as dividends and its yield is higher than widely held large caps such as Insurance Australia Group Ltd (ASX: IAG) and Telstra Corporation Ltd (ASX: TLS).

For a company that grew earnings last year by over 20%, Dicker Data’s valuation does not look overly demanding. Whether the company can repeat that level of growth in 2019 remains to be seen.

As always, businesses at the smaller end are vulnerable to a number of risks. For Dicker Data, these would include an increase in competition, an economic slowdown, rising interest rates and the loss of any key vendors (the top 5 vendors represented 57% of sales in FY18). Thus, retail investors should only consider owning the stock in a well diversified portfolio.

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Motley Fool contributor Tim Katavic owns shares of Dicker Data Limited. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and Telstra Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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