DXP Enterprises: Consolidating a Boring Industry

Jun.19.07 | About: DXP Enterprises, (DXPE)

DXP Enterprises (NASDAQ:DXPE) distributes heavy-duty pumps, power transmission and electrical equipment and other industrial supplies, largely to the oil, gas, and chemical industries. When you think “sexy”, this sure isn’t it. But DXP’s track record for growth and future potential more than makes up for it.

Growth over the last few years has been tremendous: revenues went from $161M in 2004 to $279M in 2006, and are on pace to exceed $350M this year. Net income grew 440% between ‘04-’06. The stock price has surged even more, going from $4.13 in 2004 to a high of $53.88 earlier this year.

Ok, so the company has had a great run. But I believe that there is much more to come. DXP’s growth has been driven in part by a strong oil and gas industry - which I don’t see faltering anytime soon. However, the real story here is industry consolidation.

Apparently, the distribution market for the specialized industrial equipment DXP sells is very fragmented. According to the company, sales of the top 20 distributors make up less than 10% of the market, and most distributors are family-owned. This is where DXP comes in. It’s been gobbling up companies left and right, buying up small operations with long-established products that have not been aggressive in seeking new business. They’ve already realized new pricing power: since 2004, gross margins have expanded from 24.5% to 29.8% in the latest quarter. CEO David Little, said recently that “we see more (acquisition) opportunities than we can act upon.” Through continued selective acquisitions, he seeks to grow DXP into a national industry force and billion dollar company. Given management’s successful track record for expansion, we don’t think this is unrealistic.

In order to continue this strategy, DXPE recently issued 1 million new shares at $47/share to pay down all its debt and provide new capital for acquisitions. The stock promptly dropped from $52+/share to its current level. Sporting a current market cap of $226M, a P/S under 1 and a forward P/E in the low teens, DXP is a core long-term holding of my portfolio, and this is a great entry point.

Disclosure: Author has a long position in DXPE

DXPE 1-yr chart