DNOW - hidden gold - company analysis

I got to know about DNOW from one of the selection in this list of best stock research websites. Turns out I am lucky to encounter a company with such strong fundamentals. Continue the analysis below.1 - Over the medium term, the world needs more oil and gas production2- A meaningful share of future oil and gas production growth will be driven by rigs operating in North America.If the above statements are correct, DNOW provides a very attractive risk/reward at $8.54 per share.Based on trailing financials, DNOW does not look cheap…..but if the North American rig count continues to increase to support oil and gas production growth, that means 18 - 24 months from now DNOW could double and still be a reasonable value.Distribution, at scale, is a pretty good business. They are one of the largest industrial distribution companies in the world with thousands of vendors, thousands customers, and 300,000+ SKUs. Typically, this type of two-sided network gives the distributor in the middle solid leverage over both sides to earn a decent return on capital. For reasons discussed below, DNOW has struggled to earn a decent return over the past several years. That is about to change.DNOW is unique among its publicly traded peers in its concentrated exposure to the upstream oil and gas market in North America. ~85% of their revenue is generated in North America, and the vast majority of that is in the L48. This industry and geographic concentration makes DNOW’s business significantly more cyclical than its industrial distribution peers. Demand for DNOW’s bread and butter product offering (pipe, valves, fittings, flanges, gaskets, fasteners, electrical, instrumentation, artificial lift, pumping solutions, valve actuation and modular process, measurement and control equipment), is driven in large part by the absolute level of the North American rig count and to a lesser extent the global rig count.To put it bluntly, DNOW’s financial results over the past seven years have been horrible. From 2014 to 2020, DNOW’s revenue dropped 61% as the average annual North American Rig Count dropped from over 2,200 to ~500. From 2015 to 2020, DNOW lost money in four out of six years with a cumulative pretax EBIT loss of ~$400mm (including inventory impairments). In addition, they impaired over $800mm of goodwill and acquired intangible assets (the company was built as a roll up). They also deployed over $750mm in net acquisitions (mostly in 2015/2016) for which there is seemingly little benefit in the financial statements.Fortunately, DNOW entered the 2015 downturn well capitalized, and has been able to weather the ‘15/’16 downturn storm and Covid without diluting shareholders. As of 6/30/21 they have net cash of ~$300mm on their balance sheet; however, all of that cash and then some will be required for working capital in the coming up cycle.Over the past six years, DNOW has transformed into a much more efficient organization; this transformation was accelerated by Covid. When DNOW was spun off from NOV in 2014, it was an inefficient roll up with multiple ERP systems, overlapping/duplicative branches, and a bloated G&A structure. In addition, there was boatloads of capital funding DNOW’s competition. Conventional wisdom at the time was shale growth to the moon. Oil and gas focused distribution companies were earning extraordinary profits.DNOW has cut a lot of the fat, but these efficiency gains have been obscured by poor financial results. This was primarily driven by the brutal deterioration in DNOW’s customer base’s business activity levels. Their branch locations have been reduced from 300 to 195 and employees from 5,000 to 2,450. They have standardized branch design in order to lower operating costs and allow more flexibility to expand and contract with the market.At the same time, they are centralizing their operations around larger and fewer regional distribution centers and structurally decreasing headcount through automation. They have made significant investments in technology both on the front end customer experience (DigitalNOW) and the back end order fulfillment modernization. In addition, over the past several years, management has consistently shortened their cash conversion cycle by decreasing net working capital as a % of sales and increasing inventory turns.While DNOW was transforming into a more efficient company, many of its competitors were either closing up shop or struggling just to survive. Oil and gas focused industrial distribution is an extremely fragmented industry. There are a large number of mom and pop distributors with either one location or just a handful. In between DNOW and the mom and pops there are a handful of larger but still sub scale distributors that have been decimated (e.g. WB Supply https://cases.stretto.com/wbsupply/court-docket/court-docket-category/843-voluntary-petition/).Since 2014, with a few exceptions, private equity has focused on funding industrial distributors without major oil and gas exposure and thus less cyclical earnings. The large public industrial distributors that do have oil and gas exposure (MRC Global, Grainger, Ferguson, HD Supply, Fastenal) are not keen to invest additional $ in an industry where they have been burned before and where their ESG mandates actively encourage them to shrink their exposure.In short, DNOW is in a great position for the coming oil and gas up cycle.I have created three cases to frame DNOW’s profitablity through the cycle (Low, Mid, High). The key assumptions underpinning these cases are:1. Average Drilling Rigs in the U.S.2. DNOW Revenue / Rig3. DNOW Gross Margin4. DNOW Locations Required5. Warehousing, selling and administrative expense (WSA) per LocationYou can see my case assumptions and cash flows laid out in the Appendix.Based on my assumptions, DNOW is trading at 4.2x High Cycle pre-tax unlevered free cash flow (UFCF) and 7.4x Mid Cycle. I estimate Low Cycle cash burn assuming current location count and 19% gross margin to be ~$20mm/yr. Note that gross margin gets depressed in low cycles due to inventory impairments. DOWNSIDE:Downside in Low Cycle is supported by ~$700mm of book equity value, which includes ~$300mm of cash, versus current market cap of ~$1.0bn. If we were to enter a world of 400 rigs forever, according to their 10 k forms, I think DNOW could generate ~$40mm of cash flow per year at 21% gross margin and 175 locations. That level of earnings could support a $400mm TEV which would be ~45% downside from the current share price. UPSIDE:Assuming we are on our way to an up cycle environment, DNOW could double within 18 to 24 months and still trade at a single digit multiple of pre-tax free cash flow (excluding the one time WC investment required to support the increased revenue). Catalyst Continued increase in North American rig count driving better DNOW financial resultsSourcesAll data in this analysis are retrieved from AlphaResearch's SEC filings search platforms which also includes 10q, form 8k, 13f filings, sec form 4

笔者从优质股票研究网站榜单中获悉DNOW，有幸接触到这家基本面坚实的企业。以下将继续展开分析。1. 中期来看，全球油气产量仍存在增量需求；2. 未来油气产量增长的重要部分，将由北美运营的钻机驱动。若上述论断成立，在当前每股8.54美元的价位下，DNOW具备极具吸引力的风险收益比。从过往财务数据来看，DNOW的估值并不低廉……但若北美钻机数量持续增长以支撑油气产量提升，则意味着18至24个月后，DNOW的股价有望实现翻倍，且仍处于合理估值区间。

规模化的分销业务本是优质赛道。DNOW是全球规模最大的工业分销企业之一，坐拥数千家供应商、数万名客户以及超过30万种库存单位（SKU）。通常而言，这类双边网络能让中间的分销商对上下游均具备较强议价能力，从而获得可观的资本回报率。但受下述因素影响，DNOW在过去数年始终未能实现理想的资本回报，而这一局面即将扭转。

在美股同业中，DNOW的独特之处在于其高度聚焦北美上游油气市场。该公司约85%的营收来自北美，其中绝大多数来自美国本土48州（Lower 48）。这种行业与地理集中度，使得DNOW的业务相较于其他工业分销企业具有更强的周期性。DNOW核心产品线（包括管材、阀门、管件、法兰、垫片、紧固件、电气设备、仪器仪表、人工举升设备、泵送解决方案、阀门驱动装置以及模块化工艺、测量与控制设备）的需求，在很大程度上由北美钻机数量的绝对水平驱动，全球钻机数量的影响相对较弱。

坦率而言，DNOW过去七年的财务表现乏善可陈。2014年至2020年，随着北美年均钻机数量从2200余台降至约500台，DNOW的营收下滑了61%。2015年至2020年的六年间，DNOW有四年处于亏损状态，累计税前息税前利润（EBIT）亏损约4亿美元（含存货减值）。此外，该公司对商誉及外购无形资产计提了超过8亿美元的减值（该企业系通过并购整合组建）。同时，DNOW在2015至2016年间累计开展了超过7.5亿美元的净并购交易，但从财报来看并未带来显著收益。

所幸的是，DNOW在2015年行业下行周期初期资本结构稳健，得以顺利度过2015/2016年的行业寒冬与新冠疫情冲击，且未稀释股东股权。截至2021年6月30日，该公司资产负债表上的净现金约为3亿美元；但在即将到来的上行周期中，这笔现金乃至更多资金都将被用于补充营运资本。

过去六年间，DNOW已转型为一家效率大幅提升的企业，新冠疫情进一步加速了这一转型进程。2014年DNOW从NOV分拆上市时，其作为并购整合而来的企业存在诸多低效问题：多套ERP系统并行、分支机构重叠冗余、行政管理费用（G&A）结构臃肿。此外，当时有大量资本涌入该行业支持其竞争对手。彼时市场主流观点认为页岩油气开发将迎来爆发式增长，专注油气领域的分销企业赚取了超额利润。

DNOW已大幅精简冗余开支，但效率提升的成效被疲软的财务表现所掩盖。这主要源于其客户群体的经营活动水平大幅下滑。该公司的分支机构已从300个缩减至195个，员工人数从5000人降至2450人。DNOW还统一了分支机构的设计标准，以降低运营成本，并增强随市场扩张或收缩的灵活性。

与此同时，DNOW正将业务集中至数量更少、规模更大的区域分销中心，并通过自动化从结构上精简人员编制。该公司在技术领域投入巨大，既优化了前端的客户体验（推出DigitalNOW平台），也对后端的订单履约流程进行了现代化改造。此外，过去数年管理层持续通过降低营运资本占营收的比例、提升存货周转率，不断缩短现金转换周期。

在DNOW推进效率转型的同时，众多竞争对手要么关门停业，要么仅能勉强维持生计。专注油气领域的工业分销行业集中度极低，存在大量夫妻店式的分销商，这些企业往往仅拥有1个或少数几个分支机构。在DNOW与夫妻店分销商之间，尚有数家规模稍大但仍未达行业头部的分销商，其中多数已濒临破产（例如WB Supply，详情参见：https://cases.stretto.com/wbsupply/court-docket/court-docket-category/843-voluntary-petition/）。

2014年以来，除少数特例外，私募股权机构均倾向于投资无重大油气业务敞口、盈利周期性较弱的工业分销企业。少数拥有油气业务敞口的大型上市工业分销企业（如MRC Global、Grainger、Ferguson、HD Supply、Fastenal），也不愿在这一曾令其蒙受损失的行业追加投资，且其ESG（环境、社会及治理）目标也要求它们主动缩减在该领域的业务敞口。

简言之，DNOW正处于迎接油气行业上行周期的有利位置。

笔者构建了三种情景以分析DNOW在周期内的盈利表现（悲观、中性、乐观），支撑各情景的核心假设包括：1. 美国年均钻机数量；2. 单台钻机对应DNOW营收；3. DNOW毛利率；4. DNOW所需分支机构数量；5. 单分支机构的仓储、销售及行政费用（WSA）。相关情景假设与现金流测算详见附录。

基于笔者的假设，DNOW当前股价对应高周期税前无杠杆自由现金流（UFCF）的倍数为4.2倍，对应中性周期的倍数为7.4倍。假设维持当前分支机构数量且毛利率为19%，则悲观情景下DNOW的年现金消耗约为2000万美元。需注意的是，在下行周期中，受存货减值影响，毛利率将被压缩。

下行风险：悲观情景下的下行风险由约7亿美元的账面净资产价值支撑，其中包含约3亿美元的现金，而当前公司市值约为10亿美元。若未来北美钻机数量长期维持在400台，根据其10-K年报，DNOW在毛利率21%、分支机构175个的情况下，年现金流可达约4000万美元。该盈利水平可支撑约4亿美元的企业总价值（TEV），较当前股价存在约45%的下行空间。

上行潜力：若行业将步入上行周期，DNOW的股价有望在18至24个月内实现翻倍，且其估值仍处于税前自由现金流个位数倍数的水平（不含为支撑营收增长所需的一次性营运资本投入）。催化因素：北美钻机数量持续增长，将推动DNOW财务表现改善。

数据来源：本次分析的所有数据均取自AlphaResearch的美国证监会（SEC）文件检索平台，该平台涵盖10-Q季报、8-K公告、13F持仓报告以及SEC Form 4文件。