Global Industrial Stock: A Solid Business At A Fair Price (NYSE:GIC)

Fasteners

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The modern era was built in large part by significant technological advances that led to the creation of various types of machinery and other assets. Given how large the global economy is, it should come as no surprise that there would be a large number of different products that can go into the creation, maintenance, and repair of said assets. Naturally, any sizable market will lead to companies focused on distributing these products for the customers who need them most. One of the smaller companies in this space is none other than Global Industrial Company (NYSE:GIC). Even in the face of volatility caused first by the COVID-19 pandemic and now by concerns about a potential economic slowdown or downturn, the company has demonstrated itself to be remarkably resilient and has been capable of increasing revenue and profits year after year. Long term, I have no doubt that this enterprise will do well for itself. But given how shares are priced today, I do not think that it is a value prospect. While some investors will be happy to own shares at current prices, the company is more likely than not fairly valued at this time. And in fact, relative to similar firms, it tends to tilt in the direction of being slightly overpriced. Because of this, I have decided to rate the business a ‘hold’ for now.

A small distributor with a nice track record

Before I dig into the fundamental condition of Global Industrial Company, it would be best to discuss exactly what the company is and how it operates. According to management, the business serves as a value-added industrial distributor of more than 1.7 million industrial and maintenance, repair, and operation products throughout North America. The company operates under a number of brand names, such as Global, Nexel, and Paramount to name a few.

In terms of actual product focus, the company stocks almost everything an industrial customer could want. Examples include storage and shelving products, safety and security products, carts and trucks, HVAC products, janitorial and facility maintenance products, workbenches and shop desks, tools and instruments, and so much more. It also sells its products through catalogs and by means of direct relationships that it already has with suppliers.

Historical Financials

Author – SEC EDGAR Data

Over the past five years, management has done a great job growing the company’s top line. Revenue increased from $791.8 million in 2017 to $1.06 billion in 2021. Not even during the pandemic did revenue decrease year over year. This shows the resiliency of the company’s business model and the quality of the operation. According to management, a key driver of growth in recent years has been its implementation of private branded products. In 2021, for instance, these made up 45% of total revenue for the company. Unfortunately, 2021 was the first year in which the company provided sales estimates for these private products. But management has been pushing this initiative for several years now. The upside to private products is that you tend to generate higher margins, even if their sales price is lower than what competitors are capable of achieving.

As revenue has risen, profitability has largely followed suit. Net income did decline from 2017 to 2018, dropping from $65.5 million to $49.5 million. But after that, it increased each year, eventually hitting $69.8 million in 2021. Operating cash flow has been a bit more volatile, ranging from a low point of negative $22.3 million to a high point of $68.4 million. Last year, this metric came in at $49.8 million. If, however, we adjust for changes in working capital, then this metric would have risen in four of the past five years, eventually climbing from $50.8 million to $76.3 million. A similar trend of this can be seen when looking at EBITDA. This metric ultimately increased from $50.6 million in 2017 to $91.7 million last year.

Historical Financials

Author – SEC EDGAR Data

Growth for the company has continued into the 2022 fiscal year. Revenue in the first quarter came in at $288.6 million. That represents an increase of 14.9% over the $251.1 million reported in the first quarter of 2021. This increase in sales brought with it a rise in profitability. Net income rose from $15.2 million to $22 million. Operating cash flow did suffer, dropping from $8.9 million to negative $14 million. But if we adjust for changes in working capital, it would have jumped up from $7.8 million to $24.2 million. And finally, EBITDA rose from $7.6 million in the first quarter of 2021 to $30.4 million at the same time this year.

Trading Multiples

Author – SEC EDGAR Data

Management has not provided any guidance covering the current fiscal year. And I think it might be a bit early for us to project out financial results for a company like this for 2022. What we do know, however, is that, using 2021 results, shares are likely more or less fairly valued at this time. On a price-to-earnings basis, Global Industrial Company is trading at a multiple of 18.3. The price to adjusted operating cash flow multiple is slightly lower at 16.8, while the EV to EBITDA multiple should be 14.1. As part of my analysis, I also compared these numbers to five similar firms. On a price-to-earnings basis, four of the companies had positive results, with the multiples ranging from a low of 3.3 to a high of 22.4. In this case, three of the four companies with positive results were cheaper than Global Industrial Company. Using the price to operating cash flow approach, the range was from 2 to 84.4. And using the EV to EBITDA approach, the range was from 2.4 to 16.1. In both of these scenarios, four of the five companies were cheaper than our prospect.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
Global Industrial Company 18.3 16.8 14.1
Textainer Group Holdings Limited (TGH) 4.6 2.0 11.5
Russel Metals (OTCPK:RUSMF) 3.3 5.9 2.4
Custom Truck One Source (CTOS) N/A 10.1 16.1
H&E Equipment Services (HEES) 8.6 3.9 4.5
NOW Inc. (DNOW) 22.4 84.4 11.4

Takeaway

All the data shown right now suggests to me that Global Industrial Company will likely continue to expand at a steady pace for the foreseeable future. The company is certainly generating attractive cash flows from its activities. For those with a very long-term time horizon, I think it would be difficult to go wrong buying the stock. However, I do think that shares are probably fairly valued at this time. That just means that I think that there are companies out there that could generate stronger returns than this, while I suspect that the returns generated by Global Industrial Company will be similar to what the broader market achieves in the years to come.

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