By:
Derek Gross, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
• Anixter International Inc. (NYSE: AXE) is a global distributor of
network and security solutions, aimed at improving the profitability and
efficiency of supply chains.
• The company disclosed FY18 results on January
29th, posting revenue growth for the 3rd straight year.
Organic growth was driven by the successful UPS segment and traction in
emerging markets.
• The Utility Power
Solutions (UPS) segment continues to see record growth, as it has expanded to
20% of sales in a few short years. I expect this segment to drive revenue
growth moving forward.
• Mixed signals are being
sent on important future indicators of growth. Although revenue backlog is
strong, the US Purchasing Managers Index (PMI) has been on a steady decline.
• Former CEO Robert Eck
retired during 2018, handing the reigns to current CEO William Galvin.
Key
points:
Anixter International
Inc. serves as the middleman between suppliers of electrical components used in
security, power, and network connection and end customers who use their
products to optimize their supply chain. The company reported Q4 and FY18
results on January 29th, posting revenue growth for the 3rd
straight year. $2.1B in Q4 sales were the highest in company history,
representing growth of 5.2% YoY. Besides a few minor acquisitions during Q2 18,
Anixter has grown organically, as the 4.8% organic growth rate in sales
represents the highest rate in the past seven years for the company. Much of
this growth has come from international growth, as emerging markets sales grew
by 10% organically during 2018, as well as an expansion within the UPS segment.
Anixter’s Utility Power
Solutions (UPS) segment continues to see record growth. As a mere 5.4% of
revenue in 2015, this segment has generated excellent growth, now comprising
20.4% of revenue as of FY18. The UPS segment serves electric utility markets in
which they supply electrical transmission and distribution products, and only
serves the North American market (whereas the Network & Security Solutions
and Electrical & Electronic solutions segments operate on a global scale).
Moving forward, I expect the UPS segment to continue to drive revenue growth to
management’s expected 3-6% annual range.
However, several
predictors of future revenue growth are sending mixed signals. Backlog and
contract bookings are usually used to forecast revenue. Although not disclosed
by management, they have stated in their last earnings call that both “continue
to look good” and the “pipeline is healthy”. The United States Purchasing
Managers Index (PMI), which is used to gauge the health of the manufacturing
sector, has fallen to its lowest level since 2016.
Lastly, CEO Robert Eck
retired in June 2018, ending a ten year run leading the company. William Galvin
was named his replacement after leading the Network Security Solutions segment
as a VP since 2007. Robert Eck is an alum of Marquette University and currently
serves on the Board of Trustees. Eck recently spoke to students in one of my
classes about his experiences as CEO, and I walked away with a favorable
impression of Anixter, the current management, and their long term strategy.
What
has the stock done lately?
Although Anixter has
posted relatively stable revenue and earnings numbers, the stock has not
mirrored this stability. Although the company posted record revenue in FY18 and
solid quarterly growth YoY, it did not meet Wall Street expectations on several
occasions. The stock has dropped following the last three quarterly earnings
releases, but stayed relatively flat following the Q4 earnings release in which
the company beat Wall Street expectations of EPS by 2 cents ($1.53 v. $1.51). The
stock is up roughly 8% over the past month on little news. The company will
report Q2 results on April 23rd, so expect considerable price
movement when the report is released.
Past
Year Performance:
Source:
FactSet
My
Takeaway:
Anixter has been a
holding of ours for a while now, and I don’t see any reason to divest. Although
the stock has underperformed the market for several years now, current relative
valuations are pretty attractive. P/E of 11.7x is half what is was last year,
and hasn’t fallen this low since 2011. EV/EBITDA of 7.7x is also at its lowest
level since 2012. The company still has strong fundamentals, with strong
revenue growth driven by the UPS segment and international expansion. Stable
revenue backlog gives me confidence in short term revenue growth. Although I do
have some concerns about the industry (relatively weak PMI numbers) and
significant debt obligations that essentially were pushed out several years, I
feel confident this stock will continue to perform. As a value-oriented
investor, this stock seems to have a considerable margin of safety to me. It
has underperformed for a while and has been punished by investors by a falling
market price. Strong relative valuations, momentum in revenue growth, and international
growth opportunities lead me to label a ‘buy’ rating.
Source:
FactSet
