Value Line has initiated coverage of HD Supply Holdings (HDS) in its flagship product, The Value Line Investment Survey. The company is a North American based industrial distributor of products and value-adding services that operates out of 650 locations across 48 states in the U.S. and 7 Canadian provinces. It has a workforce of about 15,000 employees that provide services including jobsite delivery, will call and direct-shipping options, and a series of other business logistics.
The company operates out of five distinct business units, including HD Supply Facilities Maintenance (27% of 2013 sales), HD Supply Waterworks (26%), HD Supply Power Solutions (22%), HD Supply Construction and Industrial – White Cap (15%), and Corporate (10%). Its Facilities Maintenance division distributes MRO products and provides value-add services and fabricates custom products to multi-family, hospitality, healthcare and institutional facilities. Waterworks, on the other hand, distributes complete lines of water and wastewater transmission products, serving contractors and municipalities in the water and waste-water industries for non-residential and residential uses. Its Power Solutions segment distributes electrical transmission and distribution products, power plant MRO and smart-grid products, and arranges materials management and procurement outsourcing for the power generation and distribution industries. And, lastly, Construction and Industrial – White Cap distributes specialized hardware, tools, engineered materials, and safety products to both residential and non-residential contractors.
HD Supply Holdings went public on June 26th, 2013. The IPO consisted of 53,191,489 shares of common stock at $18.00 per share. It is now listed on the NASDAQ global select market under the ticker “HDS”. It is largely owned by equity firms, Bain Capital and the Carlyle Group, but began as the professional services division of the Home Depot (HD - Free Home Depot Stock Report). HD Supply was spun off in an attempt to target the needs of contractors and other industrial professionals, as opposed to the do-it-yourself customer that is more suited to the home improvement department store layout. Since that time, it has become one of the most prominent names in industrial distribution in North America.
It is not alone in this sector of the market, however. In fact, since HD Supply operates in such a heavily fragmented industry, it is exposed to a great number of competitors. The largest of these competitors includes the likes of Fastenal (FAST), Grainger (GWW), MSC Industrial (MSM), and Rexel. Too, there are a bevy of small, privately-owned distributors that have the availability and local selling capabilities that are difficult for larger companies to match. All told, however, HD Supply has expanded itself to the point that it can counteract these weaknesses with pricing advantages, superior supplier relationships, and technical efficiency.
In terms of stock performance, the company has done quite well since its IPO. Considering the fact that the majority of its current locations and distribution channels were already in place prior to the company going public, we are inclined to believe that investors have taken note of the company’s long-term prospects and its competitive position in the market to make their investment decisions. Its total enterprise value trails only Grainger Inc. in the industry and, according to management, anticipated growth in HDS’ most lucrative end markets implies a modest 4% expansion of the company’s top line this year.
This seems feasible, as the company currently possesses a healthy stockpile of cash assets and near-term receivables to expand its business and manage new accounts. Worth noting, however, is the significant level of debt present on its balance sheet. Total shareholder equity is at a deficit at this juncture, and HDS carries $5.5 billion in long-term debt.
In all, these shares would be suitable for most investors wishing to sample the industrial distribution industry. But we submit that subscribers should take note of the company’s full-page report in The Value Line Investment Survey, and the various supplementary reports that coincide with newsworthy events related to HD Supply, when making an investment decision.
At the time of this article’s writing, the author did not have any positions in the companies mentioned.