Aerospace supply chain provider KLX (NASDAQ:KLXI) jumped more than 9% just before Christmas after the company said it had retained bankers to explore strategic alternatives, including a potential sale. One particular alternative seems to make the most sense in this case. And that outcome would be a disappointment for investors seeking to make this under-the-radar company part of their long-term portfolio.

Two planes flying toward each other.

Airlines and aerospace companies rely on distributors like KLX to deliver spare parts quickly. Image source: Getty Images.

The nuts and bolts

KLX was spun out of airplane-seat maker B/E Aerospace in December 2014 following a push by activist Relational Investors. The company is a distributor of fasteners, consumables, and related products to the aerospace and energy industries, and is expected to generate about $1.75 billion in sales in its fiscal 2017.

The company has beaten earnings-per-share estimates in each of its last four quarters, and revenue estimates three times since December 2016. Much of that growth appears to have come at the expense of rivals including Wesco Aircraft (NYSE:WAIR), which has missed on revenue in its last two quarters. Wesco in May suspended its 2017 guidance after new CEO Todd Renehan said, "[W]e believe the company has lost some of its 'customer-first' focus."

KLX CEO Amin Khoury, who founded B/E in 1987, said this summer on an earnings call, "[T]he differential performance between ourselves and the No. 2 competitor in the industry is pretty stark," adding that Wesco's issues have helped KLX grow. KLX claims it has booked about $625 million in new business since the beginning of 2016 attributable to market-share gains.

Shares of KLX are up 53% over the past year, and were up more than 20% even before the company announced it was exploring alternatives. Wesco, by comparison, is down 49.5% over the past 12 months. Scale is important in the distribution business because customers need a global, reliable, and quick supply of parts. KLX appears to be taking advantage of Wesco's issues to become the dominant player in the field.

What to expect next

The KLX review could conclude that continuing on the current course is the best option, or the company could decide to spin off its energy segment and focus solely on aerospace. But the most probable outcome is a sale of the entire company, likely to private equity. A merger with a strategic rival like Wesco seems unlikely due to antitrust concerns, though Boeing could possibly buy the aerospace business and add it to its existing Aviall distribution arm.

KLX has manageable debt, boasting a debt-to-equity ratio of just 0.52 (compared to Wesco's 1.32) and no maturities until 2022, and also has a $750 million line of credit. With CEO and largest individual holder Khoury flush from the $8.3 billion sale of B/E to Rockwell Collins, and only recently reminded of the dangers of public ownership from the Relational battle, a management-orchestrated buyout would seem probable. My bet is that the company's leaders are pretty far along in the process, and are likely now at the stage of making sure there are no better offers out there.

Time to kick the tires on KLX?

Barely a month ago, KLX was on a short list of companies I was considering investing in, for all of the reasons listed above. With analysts predicting that a buyout offer could come as high as $75 to $78 per share -- a nice premium to the current price of about $69 per share -- there is still a chance for a quick pop. And even if the offer never comes and speculators don't get that quick payout, they are buying into a well-run company that is dominating its industry.

However, I'm looking elsewhere. I hate the idea of buying in after a news-related spike, and I'm more interested in finding longer-term holdings. But KLX is staying on my watchlist. If the buyout doesn't materialize, this is a company worthy of a second look.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.