A Member of Pat McKeough’s Inner Circle recently asked for his advice on a U.S. company that has benefited from a Canadian acquisition.
Lawson Products is an industrial maintenance and repair products distributor with a variety of industrial, commercial, institutional and government clients. A year ago, the company purchased western Canadian firm Bolt Supply House Ltd. Pat notes that this acquisition has helped deliver stronger sales growth including a 20% jump in the latest quarter.Lawson has recovered from a series of poor management moves made prior to 2012, he adds, but it continues to operate in a highly competitive market against much larger distributors.
Q:Hi Pat: I would be interested in getting your thoughts on Lawson Products. Thanks.
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A: Lawson Products Inc. (symbol LAWS on Nasdaq; www.lawsonproducts.com) distributes over 300,000 industrial maintenance and repair products. It also provides inventory management services to customers in the maintenance, repair and operations (MRO) market. They include industrial, commercial, institutional and government clients.
The company was founded by Sidney L. Port in 1952 and is headquartered in Chicago.
Lawson’s products and services fall into several categories: automotive, chemicals, cutting tools and abrasives, electrical, fasteners, fluid power, hand tools, material handling, safety, shop supplies, storage equipment (plus inventory management and engineering services), technical information, and eBusiness and scanning systems.
The company has distribution centers in North America, and ships to customers in all 50 states, Puerto Rico, Canada, Mexico and the Caribbean. Under its Kent Automotive brand, Lawson supplies products to collision and mechanical repair shops.
Overall sales rose 6.0%, from $269.5 million in 2013 to $285.7 million in 2014. Sales then dropped 3.5% to $275.8 million in 2015 as falling crude oil prices cut demand from oil and gas producers. Sales rebounded 0.3% to $276.6 million in 2016.
In October 2017, Lawson paid $32.3 million for The Bolt Supply House Ltd. That firm distributes fasteners, power tools and related products in Canada through 13 branches in Alberta, Saskatchewan and Manitoba.
Thanks partly to that purchase, Lawson’s sales in 2017 jumped 10.6% to $305.9 million.
Growth stocks: Company turned a per-share loss into a $3.25-a-share profit
Due to writedowns, the company lost $0.81 a share (or a total of $7.0 million) in 2013 and $0.70 a share (or $6.1 million) in 2014. Lawson earned $0.03 a share (or $297,000) in 2014, but it lost $0.19 a share (or $1.6 million) in 2016. Thanks to a $19.6 million gain related to the U.S. tax reforms and a $5.4 million gain on the sale of a distribution centre, Lawson’s earnings in 2017 jumped to $3.25 a share (or $29.7 million).
The company’s sales for the three months ended June 30, 2018, rose 20.5%, to $90.4 million from $75.0 million a year earlier. Sales were higher as a result of the Bolt Supply acquisition (which contributed $9.8 million) and productivity gains for Lawson’s sales reps.
Earnings in the quarter decreased 56.1%, to $3.2 million, or $0.35 a share, from $7.3 million, or $0.80. If you exclude a one-time gain on the sale of a facility a year earlier, earnings per share jumped 75.0%.
The company ended the quarter with cash of $6.0 million, or $0.67 a share. Its debt of $16.1 million is a low 6% of its market cap.
Leading up to 2012, Lawson’s management team made a number of bad moves and subsequently had to take significant writedowns. As a result, the stock fell to $5.84 in September 2012. The company also eliminated its dividend to invest in its operations.
Lawson’s new CEO, Michael DeCata, took over in 2012 and has focused on cost cutting and fixing operational problems. Many of those issues were tied to the disastrous installation of the company’s information technology. DeCata has also expanded Lawson’s salesforce to bring in new business.
The company operates in a competitive market with much larger distributors such as Fastenal and W.W. Grainger. The stock trades at a high 40.5 times the forecast 2018 earnings of $0.74 a share.
Inner Circle recommendation: Lawson Products is okay to hold, but only for aggressive investors.
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