DistributionNOW (NYSE:DNOW) Reports Bullish Q4, Stock Soars

Energy and industrial distributor DistributionNOW (NYSE:DNOW) announced better-than-expected revenue in Q4 CY2024, with sales up 2.9% year on year to $571 million. Its non-GAAP profit of $0.25 per share was 92.3% above analysts’ consensus estimates.

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Company Overview

Spun off from National Oilwell Varco, DistributionNOW (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.

Infrastructure Distributors

Focusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.

Sales Growth

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, DistributionNOW’s demand was weak and its revenue declined by 4.3% per year. This fell short of our benchmarks and is a sign of poor business quality.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. DistributionNOW’s annualized revenue growth of 5.4% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, DistributionNOW reported modest year-on-year revenue growth of 2.9% but beat Wall Street’s estimates by 3.4%.

Looking ahead, sell-side analysts expect revenue to decline by 1.1% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

DistributionNOW was roughly breakeven when averaging the last five years of quarterly operating profits, one of the worst outcomes in the industrials sector. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, DistributionNOW’s operating margin rose by 30.7 percentage points over the last five years.

In Q4, DistributionNOW generated an operating profit margin of 5.1%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

DistributionNOW’s EPS grew at an astounding 31.3% compounded annual growth rate over the last five years, higher than its 4.3% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

Diving into the nuances of DistributionNOW’s earnings can give us a better understanding of its performance. As we mentioned earlier, DistributionNOW’s operating margin was flat this quarter but expanded by 30.7 percentage points over the last five years. On top of that, its share count shrank by 1.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For DistributionNOW, its two-year annual EPS declines of 1.8% mark a reversal from its (seemingly) healthy five-year trend. We hope DistributionNOW can return to earnings growth in the future.

In Q4, DistributionNOW reported EPS at $0.25, up from $0.22 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects DistributionNOW’s full-year EPS of $0.93 to shrink by 15%.

Key Takeaways from DistributionNOW’s Q4 Results

We were impressed by how significantly DistributionNOW blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good quarter with some key areas of upside. The stock traded up 6.2% to $15.01 immediately after reporting.

DistributionNOW put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.