Why investors buy distribution stocks
By Staff -- Industrial Distribution, 4/1/1999
We are often asked what business model attributes Wall Street seeks when investing in distribution stocks. The answer varies by investor style and risk tolerance. Nonetheless, we can provide some insight. The most successful distributors do the following:* Possess leading and defensible market positions
* Deliver a broad and deep assortment of products
* Have the opportunity to build national, if not international, logistics networks
* Provide value-added supply chain solutions
* Possess diverse vendor and customer bases, where no handful of companies controls a channel
* Have the opportunity to grow with their customers as they consolidate suppliers
* Seek opportunities for operating leverage
* Have strong balance sheets and access to capital
* Retain proven management teams with meaningful stock ownership
* And, command superior price/earnings multiples.
These characteristics underscore the importance of size advantages in purchasing power, allocating fixed costs over a larger revenue base, managing inventory most efficiently, justifying investments in new technology, and cost-of-capital advantages.
Additionally, increasing stock market volatility has driven investors to the perceived greater relative safety of larger market cap and more liquid stocks.
We believe these dynamics will foster continued consolidation of the industrial distribution marketplace. Smaller distributors who cannot garner the financial resources to achieve economies of scale or differentiate themselves through specialized capabilities are likely to seek merger partners or risk seeing their franchises contract.
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