Morningstar | Anixter Is Off to a Great Start in 2019 With Strong 1Q Organic Sales Growth and Margin Expansion
Anixter International's stock surged over 10% during intraday trading on April 23 following the release of the narrow-moat-rated distributor's first-quarter earnings results. Reported sales increased over 7% year over year (almost 8% organic growth) to a first-quarter record $2.1 billion, which topped management's guidance of 3% to 5% organic sales growth. The company delivered on its margin expansion goals, too, as first-quarter gross profit margin expanded 30 basis point year over year to 19.9% and GAAP operating margin expanded 40 basis points to 3.5%. We're maintaining our $98 per share fair value estimate and continue to see Anixter's stock as materially undervalued despite the post-earnings run up.All three of Anixter's reportable segments realized organic sales growth, and two of the three segments reported GAAP operating margin expansion during the quarter. The network and security segment delivered almost 11% organic revenue growth and expanded GAAP operating margin 100 basis points to 6.4%; the utility power solutions segment realized almost 8% organic sales growth and expanded GAAP operating margin 20 basis points to 4.3%; and the electrical and electronic solutions segment increased organic sales 2%, but lower sales volume caused the segment's GAAP operating margin to decline 40 basis points to 5.1%.
Considering Anixter's strong first-quarter sales growth, its growing backlog, and healthy sales pipeline, management raised its full-year organic sales growth guidance to 4.5% to 6% from 3% to 6% previously. Management is still targeting a 20 to 40-basis-point gross margin improvement, about 5% adjusted EBITDA margin, and $95 million to $115 million of free cash flow in 2019. At first blush, management's updated revenue growth targets may seem conservative after such a strong quarter, however, Anixter is facing more difficult prior-year sales comparisons over the rest of 2019.
Anixter International is engaged in the distribution of network and security solutions, electrical and electronic solutions, and utility power solutions through Anixter Inc. and its subsidiaries. The Network and Security Solutions segment supplies products and customized supply chain solutions. The Electrical and Electronic Solutions segment supplies wire and cable, control, lighting and electrical bulk products and customized supply chain solutions. The Utility Power Solutions segment supplies electrical transmission and distribution products, power plant maintenance, repair and operations supplies and smart-grid products, and arranges materials management and procurement outsourcing.
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