Lawson Products Expands Sales Force To Improve Customer Engagement Over Time

Key Takeaways

• Strategic acquisitions and expanding sales force are driving revenue growth, expanding geographic reach, and improving customer engagement.
  
• Focus on high-growth regions and internal value initiatives aims to enhance operational efficiencies, profitability, and return on invested capital.
  
• Acquisitions and sales force restructuring compress margins and earnings, while military sales decline and macroeconomic factors create revenue and profit uncertainties.

Catalysts

A specialty distribution company, engages in the provision of value-added distribution solutions to the maintenance, repair and operations, original equipment manufacturer, and industrial technology markets located throughout North America, Europe, Asia, South America, and the Middle East.

• Distribution Solutions Group (DSG) has undertaken several highly strategic acquisitions over the past 24 months, contributing to a 15% increase in reported revenue in fiscal 2024. These acquisitions have broadened DSG's scale, geographic footprint, and customer base, which can further drive revenue growth.
  
• The company is expanding its sales force, notably at Lawson Products, to enhance customer engagement and increase service capabilities. This ongoing transformation includes introducing new sales tools and technology, aiming to boost revenue and improve customer connectivity in the long term.
  
• Strategic focus on high-growth opportunities, such as expansions in Southeast Asia, is anticipated to leverage organic growth and capitalize on specific customer demands, helping bolster revenue and earnings over time.
  
• Initiatives aimed at integrating and optimizing recent acquisitions, such as Source Atlantic, aim to achieve operational efficiencies and margin enhancements, which will likely bolster net margins and profitability.
  
• DSG's focus on internal value-accelerating initiatives, including IT advancements and product integrations across business units, is expected to create a more profitable platform that can substantially increase return on invested capital (ROIC) over the long term.

Distribution Solutions Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Distribution Solutions Group's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 5.6% in 3 years time.
• Analysts expect earnings to reach $129.3 million (and earnings per share of $2.74) by about March 2028, up from $-7.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2028 earnings, up from -188.3x today. This future PE is greater than the current PE for the US Trade Distributors industry at 19.0x.
• Analysts expect the number of shares outstanding to decline by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Distribution Solutions Group Future Earnings Per Share Growth

Risks

• Acquisitions and integrations are leading to short-term margin compression and earnings disruptions, which could impact near-term profitability and EBITDA margins.
  
• The decline in military sales due to changes in the military ordering and approval process creates significant pressure on sales, impacting revenue.
  
• The restructuring and expansion of the sales force require substantial investments, leading to EBITDA compression and could affect net margins and operating income in the short term.
  
• Source Atlantic acquisition initially compresses overall margins and presents integration challenges, particularly affecting earnings and margin profiles.
  
• External factors like tariffs and macroeconomic headwinds introduce uncertainty, potentially influencing revenue stability and net margins.

Valuation

• The analysts have a consensus price target of $43.0 for Distribution Solutions Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $129.3 million, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 8.6%.
• Given the current share price of $29.65, the analyst price target of $43.0 is 31.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.