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Industrial distributors


valuedontlie
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Has anyone noticed the recent flurry of buying in the distribution space?

 

WCC - Atlantic Investment Mgmt at 5%, ValueAct at 2.4%

MSM - Arlington Value Capital at 1%, Vulcan Value at 7.7%

FAST - River Road at 1%

DNOW - Arlington Value Capital at 3.8%

 

The majority of these positions were accumulated in 1Q15. I find it even more interesting considering each of these companies have short interest >10% (same with GWW as well).

 

Anyone have thoughts on distributors at these levels?

 

 

 

 

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Did anyone take a look at MSM? Anything Arlington picks piques my interest. They've been growing revenues around 14 pct cagr but ebit-margins have dropped so that net income over four years is pretty much unchanged. They seem to be like Fastenal and pushing vending machines but with a lot worse margins. I guess buying MSM is hoping margins will improve but I'm not sure why they should. I like the type of business because the industry is very fragmented and thus there is a long runway of growth ahead but it is not exactly a bargain unless margins improve. There are some articles on SA but I dont have access.

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I took a quick look at MSM - valueline and morningstar reports. Looks like margins are depressed because the have been investing (over-investing?) in growth. They have promised to hold margins at current levels. Unfortunately, last earnings call is no longer available so I will need to read transcripts. Distributors seem to be facing headwinds due to low oil prices and high dollar. MSM has a different specialty than FAST which might partially explain lower margins. Looks promising on first glance.

 

DNOW also looks attractive but price seems a high given severe headwinds they are facing. I will probably open a tracking position on MSM while I do more work.

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I don't have access to that either. Anyway, just finished AR and some transcripts. They did an approx 500m acquisition in 2013 which might have been more difficult to integrate than anticipated. Direct O&G sector is only 3 percent but obviously indirect is bigger. That being said low oil and gas prices should be a tailwind mid to longterm because it will boost manufacturing. Perhaps they could be better at keeping cost down but they seem like disciplined capital allocators. Did a pretty big special divy end 2014 and balance sheet looks flexible. Dnow is my 2nd biggest position (used to be biggest but Ntelos popped) and I think the game plan is a lot alike.

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In 2013 AR management says high teen ebit-margin should be possible. It seems like margins are depressed due to growth investments and the big acquisition in 2013. Management seems very aligned with shareholders. They mentioned 4b revenue target in 2016 before but not sure that is possible. With 12,5 ebit-margin (low end) that would be 500m ebit on 4,5b marketcap or around 5b EV with a long runway ahead.

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  • 2 weeks later...

Because they are extrapolating Fastenal's model (and prior compounded growth) to other industrial distributors, and taking advantage of low expectations to load up....

 

Instead of blindly copying the big boys, you can play their game better than they can. Buy similar companies w/less active volume traded.

 

I picked up USLM (sub for MSM), MRC (sub for DNOW) and HWCC

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Because they are extrapolating Fastenal's model (and prior compounded growth) to other industrial distributors, and taking advantage of low expectations to load up....

 

Instead of blindly copying the big boys, you can play their game better than they can. Buy similar companies w/less active volume traded.

 

I picked up USLM (sub for MSM), MRC (sub for DNOW) and HWCC

I think scale is pretty important in this space. MSM has around 1m SKU's, a vending program (and it seems) pretty good IT-systems. I think the pressure are on the smaller players who can't afford and leverage these scalable systems. Only took a brief look but MRC is almost the same mcap as Dnow but without a pristine BS. HWCCs BS looks interesting but I don't know the business. Will read up, thanks.

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Also, MSM is owner-operated. Not sure management is as good as at Fastenal but they seem like competent capital allocators and revenues are growing nicely. New distribution center in Ohio has suppressed cashflows but that should change. If they can get operating margins back to 17 percent, which they indicated should be possible in a better environment, it looks good when revenues grow 10-15 percent annually. And this in a very very fragmented industry.

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Crap, I thought MSM was MLM. Scratch that off the list, its not a valid comparison.

 

I think MRC's debt is deceptive because it was LBOd by Goldman Sachs. They are paying down debt around 100MM/year, except when they make acquisitions. Its also #1 PVF company and has long-standing relationships w/most of the oil majors (less operational risk too). 60ish% of revenues is from MRO.

 

DNOW will eventually swing around but it takes time for a spin-off to gain footing. Spin-off rarely hit the ground running. Just my 2c.

 

Both are probably good opportunities...

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  • 7 months later...

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