⏩ Speedy thesis #7: DNB and GIC
Stocks that pay a dividend while you wait for capital appreciation.
Speedy thesis works as a starting point for investment research: presenting potential opportunities and helping readers to select companies and stocks fitting into their own (dividend investment) strategy and portfolio.
In the seventh edition I cover two companies and stocks whose history might shadow their current underlying performance.
A | Dun & Bradstreet - business information services. Dividend yield 1.8%.
B | Global Industrial Company - industrial distributor. Dividend yield 3.4%.
A | Dun & Bradstreet ($DNB) 🇺🇸
🔑 Low relative and absolute valuation, high cash operational flow but impaired balance sheet, concentrated ownership, recent acquisition risk/tailwind.
Dun & Bradstreet, foudend in 1841, is a business information company enjoying a market leading position in the credit risk services in the business to business segment. The company has been in and out of the stock exchange.
DNB relisted in July 2020 after being in the private market for only a couple of years. Since the relisting the stock has fallen over 60 percent ever since. When the company was taken private the balance sheet absorbed a massive amount of intangible which the company is amortizing resulting in GAAP losses.
The company’d business model is capital light and largely recurring in nature. It has a retention rate of 96%, gross margins nearly 70% and capital expenditures are 10% of the revenues.
Thesis 💡
The company creates substantial operational cash flow that well covers interest expenses, capital expenditures and dividend payments. The stock is substantially lower valued on OCF/P basis (9x) than its key peers Equifax and Experian (17x-23x). Equifax and Experian are not neccesasrily better businesses or companies. They have similar margins and indebtness.
Adjusted earnings, further adjusted with SBC and restructuring costs, is $0.84 per share, translating to a double-adjusted P/E of 13.2. This is a level of 1/3 to 1/4 of the peers, trading with P/Es of 30-40.
Since the relisting the company has been making amortizations of 26-30 % of its revenue resulting in negative GAAP earnings. The “normal” level of amotization is 4-5%. The majority of the amortization ($600 million) is due to the take-private transaction.
In 2021 DNB made three acquisitions wort of $1 billion in total. The largest acquisition was Bisnode which gave the company wider and stronger position in the European market. It is yet difficult to assess if these acquistions will create shareholder value.
DNB generates substantial operating cash flow of $500 million, of which $200 million goes to interest expenses. Turning of this tide would be beneficial for the equity holders.
Five private equity companies / institutional investors hold 40.5% of the shares outstanding.
Cons
DNB is competing against much bigger Equifax and Experian and in addition many smaller regional players. The company might be squeezed in between, the small ones with high growth desires and the two having great scale advantages.
The company has over $3 billion of debt. There are no imminent maturities, but the company’s interest expenses are over $200 million per year which consume the majority of the $500 million of operational cash flow. The debt level shouldn’t explain the multiple discount compared to the peers. Equifax and Experian have higher debt-to-equity ratios than DNB.
Further reading
There’s an excellent write-up on Value Investors Club from 2021 covering the recent history of the company, the background of the one of the main shareholders and the competitors.
I wrote a Seeking Alpha analysis recently elaborating on the different elements of the thesis outlined above.
From 2013 to 2022 Dun & Bradstreet has been able to grow revenues and cash flow from operations. The former growing with a CAGR of 3.6% and the latter growing with a CAGR of 4.8 %.
B | Global Industrial Company ($GIC) 🇺🇸
🔑 Low relative and absolute valuation, excellent capital returns, overshadowed by corporate history and bluechip peers, steady margins and profitability, no debt, concentrated ownership.
Just a couple of years ago the company was known as Systemax and in June 2021 it changed its name to Global Industrial Company. After having a dispersed operations in many kinds of retail and wholesale, the company is today fully focused on industrial distribution.
The shares tumbled on Q1 results by 13%. The company is focusing on small and mid-sized businesses which, according to the company, experienced weak demand compared to large accounts. The earnings per share declined by nearly 40%. Although its peers mainly posted good Q1 results, Global Industrial had a tough comparison period and there were some elements, that could justify an adjustment.
If mercifully adjusting the numbers, the earnings decline would be 20%. Still high, but potentially temporary struggles could be a buy opportunity. Let’s have a look.
Thesis 💡
Potentially a misunderstood company, whose history could shadow its recent development, renewed focus and good performance.
10-year average capital returns and margins are rather strong, but they are still muted by the divested businesses. It’s better to look at the figures from 2017 onwards, which I have placed below in the table.
Global Industrial has strong and steady margin profile of gross margin between 34-36% and EBIT margin between 7-9%.
The blue chip competitors, Fasternal and W.W. Grainger are trading at forward P/Es of 27 and 19 whereas GIC is trading at 13.8.
66.4% of the voting power is controlled by the Leed’s family. The investment thesis doesn’t speculate with a buy-out, Leed’s family is probably in for the long term. However, if there is increased interest in the stock, there’s not too much of free float, just an additional perk.
Global Industrial has no debt and sits comfortably on $48 million cash position. Oftentimes the company has rewarded the shareholders with a special dividend. Last time in 2021 by paying $1 per share.
The average returns on capital look different when we look at the years 2017 to 2022. This is the relevant time period if we want to look at Global Industrial in its current form. These numbers, even after excluding exceptional year 2018, are significantly higher than what the blue chip players such as Fastenal and W.W. Grainger are achieving.
Cons
Unlike GIC, most of the competitors performed well in the first quarter. It is yet unclear if this is because of the one time items and GIC’s focus on small and medium sized businesses. The company expects the weakness among SMBs to continue.
For sure, the company faces also a tough competition too. According to the Industrial Distribution trade publication it’s only the 18th largest distributor, where as many of the listed competitors occupy much higher positions.
On Seeking Alpha I published an analysis on MSC Industrial, a competitor of Global Industrial Company. However, when investigating the industry and different players, I find Global Industrial a better alternative in the space for an income investor seeking for capital gains. In the article you can find a peer to peer comparison of industrial distributors such as Global Indusrial, MSC Industrial and others.
Weyco Group, a boring shoe company, recorded excellent Q1 results, braking its previous quarterly sales and earnings record. EPS increased 84%. I presented a thesis for Weyco in my first issue of speedy thesis. I went through the results and valuation in an update on Seeking Alpha.
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