Fools looking for boring -- as in consistent and conservative -- could try Anixter International
Unlike its competitors, Anixter did what you'd expect a consistent and conservative company to do: It resisted the urge to add capacity in a booming market. Instead, it quietly bought back 20% of its stock and reduced debt between 1998 and 2003. That was a great move in an industry that survives on average operating and net margins of 3.75% and 0.95%, respectively. With margins that tight, a small increase in prices or any improvement in operational efficiency naturally goes straight to the bottom line. Anixter, after squeezing out net profits of $30 million in 2001, $43 million in '02, and $42 million in '03, shot its 2004 net income up by 74% to $74 million on a sales increase of 24%.
Net margins in 2004 improved by a whopping 36%, from 1.6% to 2.2%. Competitor Wesco International
Capital spending is slated to increase by 5% to 15% this year across the sector. And it's essential to understand where equipment distributors can really make those extra bucks -- is there any value addition, pricing power, or customer loyalty?
I think Anixter does seem to have three competitive advantages:
- Having been around for more than 50 years, it is by far the market leader in sheer breadth of offerings and geographical reach. It sells 285,000 products to 85,000 customers in 45 countries.
- It gets strong support from equipment manufacturers, along with expertise in supply chain management systems. Management believes that the support Anixter gives its customers in managing their inventory is a very strong, moat-like quality that competitors don't provide.
- Anixter has stepped on the pedal in the profitable OEM (original equipment manufacturers) business. The company wants to power up this segment from the existing 12% ($400 million) it makes up today into a billion-dollar business.
Like most cyclicals, Anixter has gone through a spell of falling revenues. It took the company a good three years to just get back to its 2001 sales levels. Since then, it has gone through cycles of piling up and paring down debt; as of 2004, its debt was $412 million, or 53% of net worth. The urge to borrow at low rates, in the expectation of better times ahead, has perhaps led the company to throw prudence to the winds. As a result, investors should be wary of returns on investments, since such debt loads in conjunction with declining returns can be an indication of liquidity/solvency issues.
At $36.82, the stock is priced at 19.6 times 2004 earnings of $1.86. Analysts expect earnings to grow 14% to $ 2.12 per stub for 2005, and that shouldn't be difficult to achieve. For a cyclical, it's a bit more than what I'd like to pay, but it is worth buying at lower levels, given that it's such a strong company in a difficult industry.
As we go to press, Anixter has declared a huge 46% jump in first-quarter earnings to $20.4 million, on a sales hike of 15% to $877 million. The stock advanced from the $33-$34 range last week to a high of $39 before settling back down to where it is now. That's great for the company, but it's a little bit of a damper for us bargain hunters.