GIC - Global Industrial Company: Expecting More Momentum From Upcoming Q3 Earnings Numbers

2023-10-26 10:45:05 ET

Summary

• Global Industrial Company (GIC) shares have rallied since the golden cross in July and positive earnings report in August.
• GIC's dividend yield is higher than its 5-year average, indicating potential value for dividend growth investors.
• The company's dividend payout history and low payout ratios suggest the sustainability of its dividend.

Intro

If we pull up an intermediate chart of Global Industrial Company ( GIC ) (US Industrial Distribution Player), we see shares printed a golden cross (crossing over of the stock's 10-week moving average above its 40-week counterpart) in July of this year. Since then, shares have rallied with the company's Q2 earnings report (announced in early August this year) being a catalyst for further gains. In that report, GIC beat its bottom-line GAAP estimate by a very impressive $0.14 per share where volume trends improved throughout the quarter. Now, all eyes point to the recent Indoff acquisition and how GIC's forward-looking financials will be affected as a result. The company reports Q3 earnings on October 31st.

First, though, some background on Global Industrial Company and what differentiates the stock against its peers in its sector. GIC at its core is a distributor of industrial, operational & repair items, but it is the company's distribution model that differentiates GIC from its competitors. Through its robust e-commerce operation and a significant number of sales teams, GIC presently has the capacity for seven strategically located North American distribution centers, which continue to fulfill demand.

Therefore, when one sizes up the ramifications of the recent Indoff purchase of almost $70 million, we understand management's long-term aim here which is to add more value to the marketplace going forward. Firstly, Indoff's 300+ sales partners will be able to piggyback on GIC's sales teams and Indoff's closely related products should mean instant market-share gains for GIC. In effect, by removing a competitor, GIC is now in a position to capture new customers who for whatever reason have decided not to use GIC's products in past times. These 'customers' will continue to order the same products as before, where GIC sees that further value can be added to these accounts through its e-commerce platform as well as through its brand offerings.

Although it must be admitted that GIC has somewhat of a checkered history (including multiple name changes over the past three decades in particular), it seems that finally, the company has its house in order. We state this because of how the financials have steadily been improving over the past 5 years or so. GIC's trailing return on equity for example of 32%+ is unparalleled in this sector, which demonstrates how GIC's streamlined direct-to-customer model generates higher returns on capital.

Furthermore, in that Q2 report, the CFO stated that the board declared a quarterly dividend of $0.20 per share which currently equates to a dividend yield of 2.45%. Therefore, given the 45%+ return we have seen in shares of GIC over the past 6 months or so, delving into the key metrics that make up the dividend can give us insights into whether the bullish trend can continue in earnest. Remember an established trend in motion is always more likely to continue than reverse all things remaining equal.

Dividend Yield

GIC's dividend yield comes in at 2.45% which is surprisingly higher than the company's 5-year average (2.19%). We state this because of how shares (as we can see above) are trading much closer to their 5-year highs as opposed to their 5-year lows. Many dividend growth investors use the dividend yield as a proxy on whether shares of the stock are indeed expensive or not. Therefore, off to a good start here.

When one delves deeper into GIC's dividend payout history (over 5 years for example), it quickly becomes apparent how this company looks after its shareholders. We state this because apart from the regular quarterly dividend (which continues to grow as we discuss below), the board of directors has paid our special dividends to the tune of a combined $13 per share over the past five years. Suffice it to say, that investors who have been invested in GIC over the past 5 years will now have a considerable percentage of their initial investment paid off.

Dividend Growth

Paying these significant 'special dividends' in recent times would not have been possible without a strong growth path. GIC's average annual dividend growth rates have remained in double-digit territory, as we see below. Growth is important because it enables investors to stay ahead of inflation and recoup their investment dollars faster, as explained above.

Pay-Out Ratio

The pay-out ratio immediately tells us whether the dividend is sustainable in its current makeup. Over the past four quarters, we see that dividend payments paid out to shareholders make up just over 43% of GIC's GAAP earnings. Furthermore, since the company managed to generate a free cash flow of $111 million over the same time frame, GIC's cash dividend payout ratio comes in at a lower 26%+. Suffice it to say, that due to how low these pay-out ratios currently come in, Global Industrial Company does not have an issue with the sustainability of its dividend at this present time.

Forward-Looking Trends & Valuation

What we have discussed up to now only dissects GIC through the rearview mirror. Therefore, to gauge how the company's earnings will pan out in upcoming quarters, we like to go through the balance sheet (specifically the company's leverage & equity trends) and consensus views on how earnings will play out in upcoming quarters. As we see below, GIC is expected to return to positive growth next year were $2.11 per share is the latest bottom-line EPS projection for fiscal 2024.

Now although, an expected 16+% earnings growth rate in fiscal 2024 followed by a negative 6%+ growth rate the following year may not attract attention to any significant degree, investors need to observe how the company's fundamental strength has been changing and we can see this through its respective free cash-flow trends.

For example, to fund the Indoff acquisition, GIC drew down $50 million of debt from its short-term credit facility (of which $10 million has been paid off already). Now given the company's prowess at generating free cash flow, we believe this $40+ million of short-term debt will be paid off swiftly.

As stated, over the past four quarters, GIC has generated well over $100 million of free cash flow which has resulted in shareholder equity climbing by over $44 million (23%+ growth) over the same time frame. Suffice it to say, although searing growth may be absent at present (when we average out the years), GIC's book value will continue to grow meaningfully which is bound to impact earnings positively in the long run. In fact, GIC's trailing book multiple of 5.15 (which will continue to fall at the present share price) still comes in well over 20% below GIC's 5-year average book multiple of 6.8. Therefore, a 20% premium on GIC's current share price would bring shares back above the $37 level which is a price closer to the GIC's true value in my view.

Conclusion

To sum up, although current market conditions have been affecting demand with the related Indoff purchase most likely squeezing margins over the near term also, we expect free cash flow and the company's book value to continue to go from strength to strength over time. These trends are in line with what we are seeing on the technical chart which is why we deem GIC a 'Buy' as we approach the company's third-quarter numbers. We look forward to continued coverage.

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