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As of 13-Jul-10

Anixter International Inc. (NYSE: AXE)

Mkt. Cap

1.43 bn

Current Quarter Earnings beat to serve as a significant upside catalyst

About

AXE

Anixter International is a leading worldwide distributor within three key product categories: enterprise cabling and security (mainly IT and communications related), electrical/electronic wire and cable, and OEM supply of fasteners and other small parts. Through its worldwide distribution network of 237 warehouses, the company supplies more than 425,000 products (half within OEM supply) to over 100,000 active customers. As a value-added distributor, its sales force provides technical expertise and supply chain services to customers.

Business

Basics

It’s in a cyclical business which depends on IT hardware and other capex as well as replacement demand. It typically lags GDP growth by 6-9 months.

Opportunity

1Q2010 was almost flat YoY and marked the last stable trough quarter of the cycle. Company is witnessing very strong demand (both real end market + pent up) from March end onwards. For 2Q sell side is estimating 3% sequential QoQ growth which is very conservative and actual sequential QoQ growth is likely to be 10% or more. If we look at normal seasonal pattern and take average of 5 year data 2Q has been better than 1Q by 8%. Further if we remove 2009 which was an anomaly, 2Q has seen a sequential growth of 12% vs 1Q for AXE's business. See below:

&

Normal

Seasonality

1Q

2Q

3Q

4Q

2009

1,271.20

1,220.60

1,273.00

1,217.60

Sequential QoQ growth

-4%

4%

-4%

2008

1,471.60

1,616.80

1,589.60

1,458.60

Sequential QoQ growth

10%

-2%

-8%

2007

1,328.70

1,511.50

1,521.20

1,491.50

Sequential QoQ growth

14%

1%

-2%

2006

1,070.50

1,239.80

1,330.50

1,297.80

Sequential QoQ growth

16%

7%

-2%

2005

876.5

936.1

1,009.20

1,025.60

Sequential QoQ growth

7%

8%

2%

Total

6,018.50

6,524.80

6,723.50

6,491.10

8%

3%

-3%

Total excl. 2009

4,747.30

5,304.20

5,450.50

5,273.50

12%

3%

-3%

Current Quarter is

Since the current quarter is the first to see "real growth" in the cycle, it represents the inflection point in terms of valuations. A lot of bigger investors who are currently sitting on the sidelines or are having small positions are likely to size up in this stock after seeing good second quarter results. Being the "inflection" quarter for a cyclical company, stock price movement after current quarter earnings beat is likely to be significant.

Inflection

Point

Correct Estimates

2010 Consensus estimates

1,272.60

1,316.46

1,331.60

1,294.69

2010 (realistic estimates)

1,272.60

1,401.00

1443.03

1399.7391

Sequential QoQ growth

10%

3%

-3%

YoY Growth

15%

13%

15%

Upside

Topline

2010 revenue

Consensus estimates

5,215.35

Realistic estimates

5,516.37

% upside in topline

6%

Op. Profit

Incremental Margins

10-12%

Lets assume 11%

Operating Income upside

33

Mn

Consensus Operating Profit

242

Mn

Realistic Operating Profit

275

Mn

% upside to operating profit

14%

EPS

Sell side consensus is assuming EPS of $4 for 2011 $3.2 for current year. In our opinion, EPS of $4 is achievable in the current year

Valuation

EPS revisions alone give 20% upside from the current valuations. Sell side numbers may be a bit slow to get revised but buy side numbers are expected to be get quickly revised after company reports current quarter.

In addition, since this is the first quarter to see growth after a bottom being established, multiple expansion is a very likely possibility as long term cyclical investors size up their positions or initiate fresh longs.

Price target

Immediate trigger would be the earnings and the stock is likely to reach at least $51 (20% upside) just after earnings are reported on July 27th. Assuming current year EPS of $4 and historical average multiple of 15 we get a target of $60 in the next 3-4 months as numbers get revised.

Risks (for stock price)

Not really any major one in short term, other than broader macros. Something like early debt extinguishment etc. might affect GAAP EPS but are unlikely to cause any concerns among investors. Euro Dollar exchange rates might affect top line a bit, but given low single digit contribution of Europe to Operating profits not much affect is expected in near term on bottom line.

Disclosure: No positions

Source: Anixter International: Earnings Beat to Serve as Significant Upside Catalyst