DXP Enterprises, Inc.: Time tested
At the turn of the century, the company that provided the roots for what has become DXP Enterprises, Inc. (Nasdaq: DXPE) set out on a path to become outstanding in its field.
The field was the cotton field. It was in 1908 that DXP predecessor Southern Engine and Pump Co. was founded, providing irrigation pumps needed to grow cotton and servicing cotton gins used to make textiles.
The Houston, Texas-based operation became Sepco in 1979, then was renamed DXP Enterprises in 1996, when it became a public company. Since then, DXP has increased its national presence and broadened its product and service lineup with organic growth and strategic acquisitions.
In addition to industrial pumps, DXP makes much more, supplying more than 770,000 industrial parts and products. The company said in its 2006 annual report that it was the 31st-largest player in industrial distribution.
DXP has seen substantial growth in MRO (maintenance, repair, operating) products, equipment and services that make up the bulk of its business — in pumps, bearings, power transmission, seals, fluid power and industrial supplies. DXP says it has some 25,000 customers in 17 states, with about half of its revenue coming from the oil and gas and chemical industries.
DXP is working to meet the supply-chain needs of its growing clientele as well, who utilize its SmartSource integrated supply program to cut costs and streamline procurement.
DXP’s chairman and chief executive, David Little, has long been the driving force behind the company, having started with Sepco in 1975. Little gained controlling interest in Sepco in 1986 and took it public a decade later. Little and some family trusts appear to control about half of the DXP stock.
Three analysts who follow DXP all have the equivalent of a “buy” or better rating on the company’s stock, according to Thomson Financial. Yet DXP’s shares are currently trading around where they began 2007 and are down more than 20% since the start of 2008. The stock closed at $36.78 on Tuesday.
When the company released its third-quarter results, DXP said net income grew 50% to $4.48 million, while revenue climbed 56% to $106.8 million. Earnings per share grew to $0.65 from $0.52 in the comparable 2006 period, beating the Thomson Financial consensus estimate by $0.08. The company noted that $28.7 million of its sales came from operations acquired between July 1, 2006, and Sept. 30, 2007.
Shares soon climbed nearly to the 52-week high of $53.88 established on April 26, 2007, closing Nov. 8 at $53.12. Since that peak, however, with the economic shakiness rippling through many industries, DXP has pulled back. The stock’s all-time high was set May 10, 2006, when it closed at $57.80. DXP’s 52-week low is $28.21.
The virtual stock-price flatlining might leave potential investors asking what’s going to pump up DXP Enterprises in a difficult economy? The answer can probably be found in its latest acquisitions.
According to Industrial Distribution magazine, the U.S. industrial distribution market carries a value of about $250 billion. But it’s a fragmented sector, with the top 20 distributors accounting for less than 10% of the total value.
Apparently DXP is hoping to change that, with an acquisition agenda that puts it on track toward establishing a national footprint. In 2005 and 2006, DXP announced a half-dozen small deals, but two more completed last year included a whopper.
Last year, DXP completed a $12.8 million cash-and-debt outlay for Indian Fire & Safety, which operates in the Southwest. But the company also paid $106 million for Precision Industries, which like DXP, is a big distributor. The deal was financed with $24 million in cash and the rest from a new $130 million credit facility. Despite taking on a big chunk of debt, the deal greatly expands DXP’s U.S. footprint from beyond the South, Southeast and Rocky Mountain regions, into the Midwest and the East and West coasts.
When DXP reports its year-end results in the coming weeks, investors should feel satiated. According to the consensus estimate of analysts surveyed by Thomson Financial, for the final three months of 2007, DXP is expected to report a 32% increase in earnings per share, to $0.80, while revenue could more than double to around $167 million. For the full year, the Thomson estimates call for DXP to report a 28% earnings increase, to $2.67 per share, with a 58% rise in revenue to $443 million.
On Jan. 14, Dutton Associates principal analyst Paul Resnik upgraded DXP to a “strong buy” from “buy,” and maintained a $60 price target that he’s had in place since the third-quarter results came out. In his update for clients, the Dutton analyst noted that DXP (DXPE) shares had pulled back 25% from the November high, which Resnik blamed on “a combination of profit-taking and concerns about general economic conditions.”
Resnik said the upcoming financial release is difficult to predict because of the Precision acquisition, but “we remain confident that DXP will report a solid gain in the period and further earnings progress in 2008.”
