DXP Takes a Big Step Forward in Its Consolidation Strategy

| About: DXP Enterprises, (DXPE)

When I originally recommended shares of DXP Enterprises (Nasdaq: DXPE) in June, I wrote how the company was undertaking a consolidation of its industrial supply industry. Most of the competing distributors are small and family-owned, and DXP spotted an opportunity to integrate these companies and become the dominant industry player. In writing last month about the market’s overreaction to DXP’s earnings miss, I noted that the underlying story hadn’t changed and the business and acquisition pipeline remained strong.

Well, last Sunday, DXP showed just how strong that pipeline was by announcing that it was buying Nebraska-based Precision Industries for $106M in cash. According to the press release, Precision has annualized sales of about $250M, which values the company at a bargain 0.42 P/S (DXP’s P/S is 0.70). There was no word on Precision’s net income, but according to an analyst at Dutton Associates, “this is because this acquisition requires a Hart-Scott-Rodino waiting period (likely two-to-four weeks) before consummation and, understandably, Precision, as a private company, has no interest in divulging this information before the deal closes.”

A little digging suggests that the Precision addition will be accretive to earnings. In Industrial Distribution’s 2007 Big 50, Precision’s President notes that “Once again, [2006] was a record sales and record profit year for us.” The magazine lists Precision’s 2006 sales at $297M vs. the aforementioned $250M, which initially led me to think that this was a company hitting a steep decline in 2007. However, Precision’s press release notes that the controlling Circo family will retain two of Precision’s software and technology subsidiaries, and I’m guessing this accounts for the difference in numbers.

Without too much information to go on at this point, the acquisition seems positive. DXPE (65 stocking locations in 14 states) gains access to Precision’s nationwide footprint (163 locations in 30 states). It also receives inroads to new markets and customers, as Precision appears to have relationships with some of the largest food and beverage companies.

Precision is a family-owned business that has been growing steadily in a sleepy industry for over 60 years. For them, joining up with DXP to create an industry powerhouse makes perfect sense. According to their press release: “Recently, Precision Industries was awarded several new supply chain service contracts and Precision Industries believes that the consummation of the sale will allow it to leverage DXP’s access to the public stock market and provide additional growth capital.”

It appears that my original thesis of DXP as a “consolidator of a boring industry” remains intact. The company remains my largest individual holding and I believe that we can expect big things over the long-term.

Disclosure: SmartGuyAB is long DXPE