Wednesday, May 8, 2019

A Current AIM Small Cap Equity Holding: Anixter International Inc. (AXE, $60.22): “Don’t Axe This Stock – Expect A Rebound Soon” By: Derek Gross, AIM Student at Marquette University


 Anixter International Inc. (AXE, $60.22): “Don’t Axe This Stock – Expect A Rebound Soon”
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

9 comments:

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