Systemax (GIC -0.64%) may not be on your radar yet. But this small-cap industrial products distributor to small and medium-size businesses has used 2019 to reposition itself and focus on a new path to growth. A new CEO and the final divestiture of its overseas business could lead to strong sales gains.
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While peer industrial suppliers Fastenal (FAST 0.04%) and MSC Industrial Direct (MSM -0.01%) may be more recognizable names in the business, Systemax distributes private-label and brand-name equipment and supplies under the somewhat more familiar name Global Industrial. But with market capitalizations of over $20 billion and over $4 billion for Fastenal and MSC, respectively, both are much bigger players in the business of industrial product supply.
A long and varied history
Systemax began in 1949 as a materials handling business. The ensuing decades consisted of much acquisitive growth. By 2008, sales exceeded $3 billion, and the acquisitions continued, including the e-commerce assets of bankrupt electronics retailer Circuit City. Systemax's sprawling technology products group also included the familiar CompUSA retail stores, and it added information technology businesses in the Netherlands, France, Germany, and the U.K.
The most recent few years have seen a divestiture of the technology products group, with the final sale of its French business closing in September 2018. What remains is a more focused, profitable North American industrial products group, with a market capitalization of approximately $900 million.
With proceeds from the sale of the French business and 2018 cash flow, the company paid shareholders a December 2018 special dividend of $6.50 per share, marking the third special dividend in a 12-month span.
The company also announced that board member Barry Litwin would become the new CEO effective January 2019, to leverage his background in e-commerce businesses and digital strategy. Litwin planned to concentrate on improving customer experience through digital channels within the industrial products group.
Back to its roots
So after almost 70 years, Systemax is now back close to where it started: as an industrial products supplier in the MRO (maintenance, repair, and operations) segment. But today's version is highly digital, with its new global industrial website having been launched this past November.
This profitable segment should keep the company in a good position for both growth and capital returns to shareholders. As of the end of the quarter that included September 2019, the balance sheet was strong, with $98 million in cash and virtually no debt, along with $72 million available under its credit facility. Free cash flow from operations was $11 million in the third quarter.
This should allow the company to continue to grow its business organically, take advantage of any appropriate potential acquisitions, and reward shareholders with its ongoing dividends.
Current efforts have been aimed at opening a new Dallas distribution center. As Litwin stated, "The expansion of our distribution network is a key component of our strategy and was critical to providing customers with shorter lead times and more-competitive shipping rates while supporting growth and long-term operating leverage."
A good valuation?
Investors should keep in mind the cyclicality of the business. So a good way to look at valuation in this sector is to compare metrics with its peers. The following chart shows that Systemax is priced lower than both MSC Industrial and Fastenal versus last year's sales (its first full year with all the international businesses off the books).
Data by YCharts.
Its forward P/E ratio also shows that while it's trading slightly higher than MSC Industrial, if Systemax's new streamlined business focus shows results, it could have the cheapest valuation among its larger peers on both metrics.
As a small-cap industrial sector company, Systemax should be positioned to grow from here and continue returning capital to shareholders -- and may be worth a look for that sector of an investor's portfolio.
