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Morningstar | AXE Updated Forecasts and Estimates from 27 Jul 2018

In our view, Anixter's broad-based organic revenue growth was the highlight of an otherwise solid second-quarter performance. On a consolidated basis, Anixter posted 4.9% organic revenue growth during the quarter, which management noted was the second-highest organic growth rate the firm has achieved over the past six years. Profitability was also solid, as the firm's adjusted operating margin of 4.5% was mostly in line with the year-ago quarter and improved 90 basis points sequentially. On a reported basis, which includes the favorable impact of copper pricing, foreign currency translation, and Anixter's recent acquisitions, revenue grew almost 7% year over year to $2.1 billion, which beat the consensus estimate by $21 million. Adjusted EPS of $1.53 increased 12.5% year over year and beat the consensus estimate by $0.04. After reviewing Anixter's results, we've maintained our $107 per share fair value estimate.

All three of Anixter's segments contributed to the firm's organic revenue growth. Both network and security solutions and electrical and electronic solutions increased organic revenue about 5%, while the utility power solutions segment generated about 6% organic revenue growth. Management noted Anixter has a robust project backlog and pipeline, which gives the team confidence that better growth can continue. Indeed, management raised the midpoint of its full-year organic revenue growth target to 4.3% from 3.5% previously. We still believe that over the long run, a 4.5% revenue growth rate is a reasonable assumption for Anixter.

Anixter announced two developments that we think could support improved profitability. First, the firm's $150 million acquisition of three Australia-/New Zealand-based distributors should be accretive to its adjusted EBITDA margin. Second, Anixter announced a restructuring plan, which cost $9.2 million (pretax) during the quarter but should generate $10 million of run-rate EBITDA savings by the end of 2019.

Collectively, the three acquisitions (Central Security Distributors, Atlas Gentech, and Inner Range) generated a 17.5% adjusted EBITDA margin in 2017. This will prove to be accretive to Anixter's EBITDA margin, which has been hovering around the low 5% range as of late. Recent acquisitions by competing distributors tells us that it's relatively uncommon to find a distribution target that is immediately accretive to EBITDA margin, especially for only 7.5 times EBITDA (Anixter currently trades at about 9.7 times trailing EBITDA).

In terms of the restructuring program, Anixter is planning on consolidating redundant facilities and back-office functions that came with the Tri-Ed and Power Solutions acquisitions in 2014 and 2015. The firm has talked about such actions on and off over the past couple years, but it appears that the cost-reduction plan is finally coming to fruition. As mentioned above, Anixter expects to generate $10 million in run-rate savings in 2019, which equates to about 50 basis points of EBITDA margin improvement at current levels of profitability.