Monday, February 7, 2011

Anixter Distributes Growth

Anixter Ohm Sweet Ohm







Anixter is a world leading component distributor and a good play on global growth in manufacturing. The recent results were excellent and the stock has many positive drivers. It is a good stock to research. Rising commodity cost pressures are always a concern but, as a distributor, they should be able to pass raw material costs on.

Before talking about the company in more detail, I want to make some remarks on the recent results.

Anixter Q4 Results

According to Anixter, the global manufacturing outlook appears to be accelerating. For example Anixter sales are normally down 3% sequentially from Q3 to Q4. However, this year there was a sales increase. Most notably, it is North America and Europe that is normally weak in this period, but this year Anixter saw increases. Emerging markets were strong, in line with what everybody else is reporting in the sector.

The results weren't entirely positive for Anixter as they suffered a $17.3m unfavourable movement from discontinuation of a key Alcatel-Lucent account. On the other hand, Anixter benefitted from $19m in favourable copper pricing. In addition, Anixter have made good progress in managing working capital requirements as revenues have picked up. Ultimately, this will help cash flow generation in future.

From the conference call...
'we had some very strong focus on working capital management with $500 million roughly increase in revenue if you look at our historical measures where it takes about $0.25 of working capital per revenue dollar, that would have implied a working capital investment for the year of somewhere in the range of $125 million. But I think the actual number was somewhere in the $30 million, $40 million range. So we feel that we did a pretty good job on getting some enhanced inventory turns in certain parts of the business, getting better receivable collection in parts of the business. We certainly are going to continue that focus as we go into 2011. I'm not sure we can expect to get quite that much leverage other than that'
...in other words, they have demonstrated that the increased revenues are creating accelerated cash flow generation. This is a critical point for distributors as they can easily find growth being financed by having to increase inventories disproportionately. 


Anixter End Markets

Anixter has three main divisions and various industry verticals within these divisions. I'll briefly run through them in turn.

Enterprise cabling and security, representing 54.1% of revenues. Anixter is seeing good growth in IT infrastructure spending. In particular, Anixter is exposed to security and video surveillance spending, IP video networking and data centre spending. All of which look set for good growth in 2011.

Wire and Cable, representing 31.8% of revenues. This division looks set for strong growth in 2011. It is heavily exposed to late cycle major engineering projects. In particular with industrial, mining and energy projects. Quoting from the conference call..
'Mining projects in South America and Canada are going gangbusters. There are new mines opening in China, in Northern China. There are a lot of gas projects in Australia and Indonesia right now. There are gas and oil projects in the Middle East. There's a lot of development continuing there and power gen, there's projects in the U.S., Europe, North Africa, South America and Asia. So fairly broad I guess I'd say in the Emerging Markets, the places where you typically think of resource base and oil and gas kind of projects.'
....and this division looks set to provide Anixter with the strongest growth prospects for 2011.

OEM Supply, representing 14.1% of revenues. This division is the earliest in the cycle for Anixter and should see tougher comparables going forward as a result of recovering first. Furthermore, Anixter management were keen to note that they key aerospace industry vertical is likely to be flat for 2011. The relative weakness of aerospace supply is that Anixter's customers (Boeing and suppliers etc) still have inventory to workdown. Furthermore, Boeing 787 delays are holding back sales and Anixter is not a major supplier to Airbus.

Anixter Stock Evaluation

Anixter analyst forecasts are for EPS of $5.03 and $5.75 for 2011 and 2012 respectively. With a current share price if $68.5, this puts Anixter stock on forward PE ratios of 13.6x and 11.9x respectively. This is attractive for a company set to grow earnings in the teens. However, I always think that distributors should command an evaluation discount because of the gearing towards risk. A lot of good growth has been priced in and, any slowdown in the global economy could leave them with unwanted inventory and falling margins.

That said, growth prospects look good for 2011 and I think Anixter stock is better priced at closer to $77 or 15x 2011 forecasts. I will look for a dip here before buying, as a 12% return is probably not enough for me and the stock price has risen strongly recently. I don't like buying stocks too far from the 50 day moving average.