Graybar & Anixter Q3 – Two ends of the spectrum

Anixter and Graybar reported their Q3 results this week and it appears that, while the market is slowing, the construction market continues to outperform the industrial business. Graybar outperforms the publicly traded national companies.

Graybar

Graybar is always a “short” in its releases, but, the 150 year old company announced

• Net sales of $1.98 billion, a 5.9 percent increase compared to the same period last year. (higher than the performance seen from Grainger and the MRO market, which is a good omen for the construction market, which is Graybar’s forte … medium / large contractors.)
• Through nine months they are up 6.9% to $5.4 billion (and as you can see, the growth rate slowed down in Q3, indicative of overall market trends.)

Based upon their 10-Q:

• Sales by segment were:
  • Industrial / utility was up 6.9%
  • Construction was up 6.7%
  • Commercial, Industrial, Government was up 3%
• Their gross margin was 19% (not bad given that there mix has electrical, utility and datacom segments and they focus on large contractors / large projects which are lower gross margin)
• SG&A is 14.8%
• Net income is only 2.45% for the quarter (but always hard to evaluate given the company is employee-owned and has the pension benefits)
  • Over the years there has been talk about Graybar’s pension plan.  “We have a noncontributory defined benefit pension plan (the “Pension Plan”) covering substantially all employees first hired prior to July 1, 2015 after the completion of one year of service and 1,000 hours of service.  The Pension Plan provides retirement benefits based on an employee’s average earnings and years of service.  These employees become 100% vested after three years of service, regardless of age.” (some key points … “after the completion of one year” and “100% vested after three years regardless of age” … can be an attractive benefit.)
• Service revenue is <1% of gross sales
• Their business mix has slightly changed in the quarter
  • Construction is not 60.8%, up from 60.4%
  • Industrial and Utility is down to 18.9% from 20.9%
  • CIG (Commercial, Institutional, Government) is up to 20.3% from 18.7%

Year to date:

• Construction is 60.3%
• Industrial / Utility is 19.1%
• CIG is 20.6%

Overall, given the overall national macroeconomic construction and industrial environment, Graybar seems to be doing well.

Anixter

A couple of major things regarding Anixter:

• Anixter sale
  • It’s been well reported that they’ve agreed to be purchased by CD&R, the private equity firm that has been involved in WESCO, Rexel and HD Supply over the years.
  • The offer is for approximately $3.8 billion for a company that is about $8 billion in revenues (47.5% of sales, which is low from an electrical viewpoint but, given Anixter’s business mix – utility, data com – may not be “too bad”)  It is interesting to see that Anixter’s market cap is only $2.82 billion with the stock closing at $84.10 on 10/31/19, $3.10 higher than the offer … and for comparison, WESCO’s market cap is $2.16 billion.
  • The company’s rationale, per the quarterly call (below) and mentioned in Tedmag.com,  is “the board made a decision in the best interest of shareholders”.
  • This is not the first time the company sought to go private.  Five years ago Sam Zell, who owned 15% of the company, tried to sell to private equity in a “take private” deal.  Interestingly, then the market value of the company was $3.4 billion. So, the generated an incremental $400 million in 5 years … or 12% over 5 years.  Perhaps the Anixter board, of which Sam Zell is Chairman of the Board, felt “time to cash out”? (interestingly, Chuck Swoboda, formerly of Cree, is also on the board).

The question then becomes, what does CD&R do with the company presuming no one else makes a higher bid by the end of the year (very doubtful any strategic buyer does but they’ll kick the tiers in the hope of learning some information … could be another private equity firm that values it higher)…

• Run it the way it is with a focus on process improvement / cost cutting to improve profitability?
  • Conduct a review and spin off elements of the business … all or some:
    • Electrical
    • Utility
    • Datacom (Communications & Networking)
    • WireXpress
    • Security
  • Prune pieces and focus on selected areas and add “bolt-on” acquisitions?
  • Could they “spin” off electrical (the old Hughes / HD Supply electrical group) and acquire others … perhaps a quasi national distributor??

The one thing we do know is that key manufacturers will want a sense of direction as it could impact their distribution strategies (but doubtful much of an impact in the electrical space.)

• From the Anixter Q3 earnings call and presentation with a focus on the electrical aspect of the business:
  • Started the call talking about the acquisition.
  • Q3 sales up 2% (2.6% organically) to $2.2 billion with growth in all segments except EES (which is where the electrical division is)
    • NSS (Network), 53% of sales, had sales of $1.2 billion, up 4%
      • NSS North America was up 4%
    • EES (Electrical and Electronic), 26% of sales, had sales of $580 million, down 2.2% organically
      • North America decreased 2% due to “softness in commercial, industrial and OEM businesses.
      • Operating income for this division is 6.1%, lower than NSS but higher than UPS
    • UPS (utility), 21% of sales, had sales of $463 million resulting in a 4% growth.
      • Solid growth in US and Canada
  • Overall gross margin was 20.1%, up 60 basis points from prior year
  • Operating expenses were 15.5%
  • Net income of 2.7%
  • North America is 82% of Anixter’s business.
  • See some headwinds in the automotive and semiconductor segments
  •  “Good execution by the team wile the market experienced some softness in the global economy” (remember the adage about rising and falling with the tide? Doesn’t sound like taking share, although their indices suggest they are … but would gather not in electrical!)
  • Outlook
    • Expect to see weakness in the OEM business in North America, which is tied to industrial manufacturing but booking trends is positive.
    • Below full-year forecast will be sales of 4-5%, down from 4-6% (had a good first 6 months)
    • Continuing to progress with margin improvement initiatives as well as digital innovation and business transformation initiatives to deliver “start of the art customer-facing technologies” and “best-in-class enterprise efficiencies” (so, they are investing, which, with CD&R involved should help ensure cost-outs are realized.)

So, two ends of a spectrum.  Graybar with 150 years, employee owned and essentially a 6% growth in primarily the construction market.  Anixter, a publicly held company being sold / taken private, more industrially and infrastructure oriented with a 2% growth for the quarter.  Yes, a contrast, but the commonality is both experienced, and see, a slowing market.

Thoughts on

• Q3 market?
• 2020 outlook?
• Anixter selling? Will it start a year end rash of announcements?

Click here for Rexel’s Q3 performance, here for Grainger’s performance and here for WESCO’s