On September 6, 2023, Distribution Solutions Group (DSGR, Financial) stock saw a daily gain of 3.95% and a 3-month loss of -1.47%. The company's Earnings Per Share (EPS) (EPS) stood at 0.58. The question that arises is whether the stock is modestly undervalued. This article aims to provide a comprehensive valuation analysis to answer this question. Read on for an insightful exploration.
Introduction to Distribution Solutions Group
Distribution Solutions Group Inc is an industrial distributor of maintenance and repair supplies. The company operates through three segments: Lawson, TestEquity, and Gexpro Services, with the TestEquity segment being the key revenue driver. This segment distributes test and measurement equipment and solutions, electronic production supplies, and tool kits from its leading manufacturer partners supporting the technology, aerospace, defense, automotive, electronics, education, and medical industries.
As of the date, the company's stock price stands at $25.5. However, the GuruFocus Value, an estimation of the stock's fair value, is $34.09. This discrepancy paves the way for a deep dive into the company's intrinsic value.
Understanding the GuruFocus Value
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $25.5 per share, Distribution Solutions Group has a market cap of $1.20 billion. Based on the GF Value calculation, the stock is estimated to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength of Distribution Solutions Group
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Distribution Solutions Group has a cash-to-debt ratio of 0.07, which ranks worse than 84.83% of 145 companies in the Industrial Distribution industry. Based on this, GuruFocus ranks Distribution Solutions Group's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth of Distribution Solutions Group
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Distribution Solutions Group has been profitable 6 times over the past 10 years. Over the past twelve months, the company had a revenue of $1.40 billion and Earnings Per Share (EPS) of $0.58. Its operating margin is 4.65%, which ranks worse than 58.11% of 148 companies in the Industrial Distribution industry. Overall, GuruFocus ranks the profitability of Distribution Solutions Group at 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Distribution Solutions Group is 18.4%, which ranks better than 82.64% of 144 companies in the Industrial Distribution industry. The 3-year average EBITDA growth rate is 39.7%, which ranks better than 83.72% of 129 companies in the Industrial Distribution industry.
Comparing ROIC and WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Distribution Solutions Group's ROIC was 3.67, while its WACC came in at 7.64.
Conclusion
Overall, Distribution Solutions Group (DSGR, Financial) stock is estimated to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 83.72% of 129 companies in the Industrial Distribution industry. To learn more about Distribution Solutions Group stock, you can check out its 30-Year Financials here.
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