- Revenues grew 23.9% Y/Y in total, with 4.2% organic growth. EPS grew 11.1% Y/Y and margins were slightly down Y/Y. Operations of the acquired Natpro and B52 businesses stabilized.
- The thesis has worked exactly as expected, with the stock price rising, but at a much slower annual rate due to higher debt resulting in lower future acquisition growth potential.
- I reiterate my long thesis and set a target price of $100 per share for the next 24 months is, offering a 28% total upside.
DXP Enterprises, Inc. (NASDAQ:DXPE) reported strong sequential and year-over-year revenue and EPS growth for the second quarter of 2014 (SEC filing, earnings call, press release). Sales were $381.6M, an increase of 23.9% Y/Y, with organic sales increasing $13.1M or 4.2% Y/Y. Gross profit was $111.0M, or 29.1% of sales, compared to 29.7% of sales, for the second quarter of 2013, so a slight gross margin fall Y/Y. SG&A improved from 22.2% of sales to 21.7% Y/Y of sales. Operating income was $28.4M, surging almost 22% Y/Y thanks to rising sales. Operating profit margin fell slightly to 7.4% from 7.6% a year ago. Net income of $15.5M was up 13.0% Y/Y. GAAP EPS was $1.00, up 11.1% Y/Y. During the second quarter, DXPE saw strong organic growth within its supply chain services segment, organic sales were flat within the innovative pumping solutions and service centers segment sales modestly increased. Service centers revenue was up 14.2% Y/Y with a 10.2% operating income margin. Organic revenue was up 3.7% year over year. Innovative pumping solutions revenue was up 71% Y/Y with a 17.4% operating income margin. Organic revenue was down 0.3% Y/Y. Supply chain services revenue was up 13.8% Y/Y with an 8.5% operating margin.
DXPE saw improvement in both Natpro and B27 acquired businesses, which is a very positive development after a disappointing Q1. Investors certainly viewed this as a positive after weak Q1 numbers, and rewarded the stock with a 10% rise. David R. Little, Chairman and Chief Executive Officer, summed up the current situation really well: "Reviewing our second quarter results, we are pleased with the progress we have made since our first quarter but believe we still have plenty of work ahead of us." The company feels the overall economy is only going to provide modest growth but DXP remains committed to executing strategies that will take market share, improve operating performance and provide returns to shareholders. DXPE's leverage ratio was 3.1:1. During the second half of the year, the company expects to improve its cash position.
My original thesis from a year ago worked well, when I expected a continued stock price rise, but at a much slower annual rate, based on high debt load that would prevent acquisition-driven growth to keep pace with the past. With the stock returning ~77%, but later giving up lots of the gains on a huge earnings miss and re-set of expectations after an acquisition of B52, the thesis proved to be correct and I later updated it here. Following the current Q2 results, I am reiterating my long thesis as I see some healthy organic growth plus large acquisition-driven growth still present in the current numbers, but I am also reiterating my opinion that future growth will be much slower, translating to "just" 10% to 15% annual stock gains. My target price for the next 24 months is $100 per share, offering a 28% upside within two years.
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