On October 4, 2023, Distribution Solutions Group Inc (DSGR, Financial) closed at $27.05, marking a daily gain of 2.91%. Over the past three months, the stock has seen a gain of 1.14%. Despite these positive trends, the question remains: is the stock modestly undervalued? With an Earnings Per Share (EPS) (EPS) of $0.58, we delve into a comprehensive valuation analysis to answer this question.
Company Introduction
Distribution Solutions Group Inc is an industrial distributor specializing in maintenance and repair supplies. The company operates through three segments: Lawson, TestEquity, and Gexpro Services, with the TestEquity segment generating the majority of the revenue. TestEquity provides test and measurement equipment, electronic production supplies, and tool kits to a range of industries including technology, aerospace, defense, automotive, electronics, education, and medical.
At a market cap of $1.30 billion and sales reaching $1.40 billion, the company's stock price doesn't quite align with its GF Value of $34.39, suggesting modest undervaluation. This discrepancy paves the way for a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed based on three key factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's fair trading value.
If Distribution Solutions Group's stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued, and its future return will likely be higher. Given that DSGR's current price is $27.05 per share, it appears to be modestly undervalued.
As a result, the long-term return of Distribution Solutions Group's stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength poses a higher risk of permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy its stock. A great starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage. DSGR's cash-to-debt ratio of 0.07 is worse than 83.22% of 143 companies in the Industrial Distribution industry. GuruFocus ranks DSGR's overall financial strength at 5 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. A company with high profit margins is usually a safer investment than those with low profit margins. DSGR has been profitable 6 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 58.22% of 146 companies in the Industrial Distribution industry. Overall, DSGR's profitability is ranked 6 out of 10, indicating fair profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. DSGR's 3-year average revenue growth rate is better than 82.27% of 141 companies in the Industrial Distribution industry. DSGR's 3-year average EBITDA growth rate is 39.7%, which ranks better than 83.33% of 126 companies in the Industrial Distribution industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, DSGR's ROIC was 3.67 while its WACC was 7.99.
Conclusion
In summary, the stock of Distribution Solutions Group (DSGR, Financial) shows every sign of being modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 83.33% of 126 companies in the Industrial Distribution industry. To learn more about DSGR's stock, you can check out its 30-Year Financials here.
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