DNOW - DistributionNow

[Phaceliacapital]

Hi all,

 

with the recent selloff in the past couple of weeks a lot of energy related stocks have gone down considerably. While still very underweight the sector, there are some stocks that we like, and which have become a little bit more interesting. One of those is DistributionNOW, with ticker DNOW.

 

Summary Investment Thesis:

 

• 7th largest industrial distributor in 2013, 2nd largest in energy.

• Sticky business thanks to entrenchment with customer’s IT systems, having on-site inventory locations, …

• Customer base highly diversified.

• Quasi recurring MRO business is around 50% of sales.

• #2 player in an industry that is poised for consolidation as the value provided by a distributor comes from the scale and density of its network.

• This is clearly illustrated as it is one of the few spinoffs with a net cash position (+ available credit facility at USD 1bn), giving it significantly more firepower than #1 player MRC (levered at almost 4x EBITDA).

• Excellent management team.

• Limited exposure to lower value lower margin OCTG business. As an extra, customers are less price sensitive to higher-value products as they want to avoid downtime at all costs.

• Capital light model thanks to low PP&E requirements (company uses ST leases for warehouses).

• Long term tailwinds thanks to “hourglass” business model and larger customers increasingly opting for single source global procurement contracts.

 

 

How do they make revenue?

 

One of the largest distributors to Oil & Gas industry – according to Industrial Distributor Magazine DNOW is the 7th largest distributor overall, and 2nd largest in O&G. They are predominatly active in pipes, valves & fittings (PVF). What we like about their revenues is that almost half is related to MRO (maintenance, repair and operations) which is highly recurring business. They buy left and distribute right, it's pass-through business so margins are not high (6% - 8% EBITDA) but capex is low so nice cash generation capability.

 

We like the business model because there is a clear value proposition for both the suppliers on the right side (improves their working capital, distributors help introduce new technologies/products and give access to a network of clients that is impossible to create from a capital outlay perspective) and also to clients on the left side.

Advantages for the clients include: possibility for global procurement (if Shell decides to expand into Asia they do not need to develop an additional distributor relationship, they just use their existing DNOW relationship), value added services (product testing, technical assistance, warehouse management) that allow them to focus on their core competency (drilling not inventory management) and other services such as supplier verification, ... .

The nice thing about relationships between distributors & its clients is that these are typically integrated in each other's IT systems which gives you a certain degree of stickiness.

 

The company's product portfolio has evolved rather nicely in the past years:

- Limited exposure to low margin OCTG business (1% of sales)

- Expanded into mid/downstream (were mostly upstream) and into other end markets thanks to Wilson & CE Franklin

- Diversified customer base (top 20 equal 33% of rev)

 

Some notes:

 

- Oligopoly industry: Thanks to NOV's acquisition of Wilson & CE Franklin, 40% of the market is now controlled by MRC & DNOW. Other competitors have less than 10% market share. We believe the industry will remain oligopolistic, and those with an already large piece of the market should remain market leaders. Our reasoning mainly follows from scale advantages.

 

Yes, while scale is often touted as a comp advantage, we believe this is especially so in the distributor market. First of all, the more companies you are servicing on the right hand side (your clients), the faster certain geographic locations become popular. (Is it worthwhile to set up shop in a place where you have one client relationship? Not really.. Is is worth to set up shop if you have 10 client relationships there? More probably so, right?)).

 

A second advantage of scale is, the more clients on the right hand side, the more volume you are taking on the left hand side. The more volume, the better the price discount. The better the price discount, the happier your clients on the right hand side and the more business you will typically receive. A strong reinforcing circle that encourages further consolidation.

 

- Scale, scope of offering and location are the most important factors to be a good distributor. To support a wide range of SKU's you need a strong & large balance sheet. + to support both global sourcing and distribution you need a sufficiently large network. Both are present at DNOW.

 

- Completion of integration of CE Franklin & Wilson: Before spinning off, the company made sure that a SAP ERP system was fully in place. This should lead to an improved efficiency in the company's operation, in addition, the company has also moved towards a hub-and-spoke network (which was how Wilson was operating in the first place).

 

- Management Team: The CEO of NOV (Morningstar's CEO of the year in 2012) stepped down as CEO and assumed the role of chairman. He is joined by a very experienced management team so we don't see any problems here. The capital allocation at NOV has been nothing other than outstanding so at DNOW this was an easy box to check. For instance, management put all acquisitions on hold until wilson & ce were properly integrated. In latest conference call they mentioned that they have started to look again at potential deals (including already having walked away from some due to the price). Performance metrics for compensation are Return on Capital & Total Shareholder return (stock market performance).

 

- Hourglass business model: Capital light as they are taking it from the left hand side and selling it to the right hand side. Margin expansion comes from a. increased efficiencies (SAP ERP systems, further integration) but most importantly b. volume growth. Once your initial inventory outlay is made the company starts bulking cash. + what we also like is the countercyclical effect when business goes down, inventory levels are lowered and cash is generated.

 

- Exposure & Risks: Fluctuation in oil & gas prices as this influences capital spending in the sector. Overpaying for acquisitions (highly unlikely).

 

- Growth: We estimate growth to be GDP plus kind of growth. Between 5% - 7% on a long term basis. Growth is driven by global E&P spending, aging US infrastructure, refining spend etc...

 

Financials:

 

- Messy as spin off and no full year results disclosed. + Integration costs of both Wilson & CE franklin (which were both lower margin business). In 2013 & 2012, 82% and 56% of capex were integration related, given no new acquisitions this should start to average out in next year's results. Working capital currently runs at 30% of sales but this should go down to 25% once ERP system is fully operational. FCF conversion is around 94%.

 

- Modelling around 6% EBITDA margins in 2015. Take revenues around 4.6 bn in 2015 @ 6ish EBITDA, gives you around 275 mn. We think the business deserves at least a 12x multiple. This gives you EV of 3.3 bn and mcap of 3.5 bn. Shares outstanding are 108 mn so this boils down to 33 a share. (rough calculations).

 

For a bull case, the same calculations at 8% EBITDA give you 4.4 EV, 4.6 mcap and 42 per share. We think 8% is achievable around 2016 but will come back to this once we see the earnings impact from the current environment.

 

Catalysts:

 

• Bolt-on acquisitions to increase value distribution network.

• CapEx and margins revert back to normal levels as the ST impact of integration/spin costs fade away.

• In addition, due to training of new personnel etc revenue generation has been slower than usual and this should pick up in 2015.

• Strong end market growth from tar sands (require more infrastructure), aging infrastructure and LNG facilities.

• Picked up by Wall Street analysts.

 

 

[frommi]

Nice work, thanks. I have this already on my nice-to-have list, but i miss a downside or bear scenario especially in the current macro environment. There is a short thesis posted on VIC thats basically saying its a cyclical business and you are looking at peak EBITDA. (And looking at CAPEX forcasts for oil companies, the downturn has just started.)

 

Perhaps i am overthinking it, but most oil service companies are dependend on rig and well count. Is it possible that we get more oil out of the same wells through better technology and a declining rig count while still getting more oil? When i remember it right this is what happened with natural gas. But i am a total rookie in understanding these things, so i would like to understand why this can`t happen with oil, too. Or if it happens, why it has no impact on revenues for a pipe/valve distributor.

[Homestead31]

if you could talk about your revenue assumptions for 2015 that would be great... 

 

i too have had this on my list, but i haven't gotten comfortable with the current low oil environment... of course, that is what creates the opportunity here, and as Munger has said in the past, "Tough periods allow the strong and capable to strengthen. Over time the stock price will gain if you build business value. Carnegie Steel built its business during bad times. Opportunities happen with trouble.”

 

Given the former NOV CEO's strong record of acquisitions, the current downturn should in theory be a huge opportunity for DNOW (and its debt free balance sheet) to roll up the industry but i haven't gotten comfortable that a declining rig count can be offset by acquired revenue.

 

any thoughts appreciated!

 

[fisch777]

Frommi - I think this is valid concern regarding better technology and efficiency in drilling and its effect on E&P capex.  For instance, Range Resources is cutting 2015 capex by 14% y/y, yet production is expected to still grow 20-25% (as they have done historically).  Range is explained this is largely due to the company ramping up the experience curve and plainly getting better at drilling.  They are drilling longer laterals and more wells per pad, likely meaning fewer bits, less pipe.  Also, fewer new pads are needed, which means less incremental gathering infrastructure, roads, fence, etc.

[Lowlight]

Great posts so far.  I am new to CB&F so take these thoughts with a grain of salt. I have been an owner of NOV for a few years now and was happy to see the spin off of NOW.  I think the opportunity certainly exists for NOW to grow meaningfully both organically and through acquisitions over a 3-5 year span.  I've modeled in 5% organic growth and (what I believe is) a reasonable assumption of $200MM - $400MM in acquisitions over the next 5 years (for $1.4 billion in total).  At this level, and based on management's discussion of scale efficiencies, I feel it is likely that NOW can obtain an 8% EBITDA margin pushing ~$600MM+ in EBITDA by 2019.  Management has already indicated > $100MM in acquisitions within the pipeline and I believe that the downturn in oil prices will only strengthen the pipeline.  While I may be wrong on the timing of the cash flow, I believe that incremental revenue above today's levels will provide significantly more growth in net income.  I see pre-tax ROIC getting above 25% (17.5% after tax ROIC on mid $400M net income) in 2019 and would be interested in hearing whether others can envision this kind of growth.  For me, the fragmentation in the industry leads to a sink or swim marketplace for smaller distributors and I can't see companies hanging around in a severe downturn.  My biggest concern is the ability of management to achieve the 8% EBITDA target through efficiencies at today's revenue levels.  I haven't seen anything in NOV's past filings that would lead me to this conclusion, although MRC seems to be more efficient, producing better margins.

 

[Phaceliacapital]

Thanks for the replies.

 

First of all, I am not an engineer so I can't really comment on technological advancements and their impact on for instance how many pipes you need to get oil out of the ground.  But I do think it's safe to say that technology will let us 1. get more oil out the ground more efficiently and 2. get oil out of the ground where it was deemed very inefficient. What I do know is that for shale plays directional drilling requires 3-5x the PVF used when compared to conventional drilling. Further, midstream infrastructure is old and should provide additional demand.. Even in the LT I would reckon it's unlikely that rig count or something similar would drop off..

 

And yeah, it's difficult to assess the impact of the current oil environment (we didn't really expect 55 dollars a barrel) because DNOW does not provide an exposure breakout in its financials. We'll have to wait for Q4 and FY results to see what kind of damage we are dealing with. That being said, we believe there are several mitigants that should provide value in the current downturn. 1. around 50% is coming from MRO business which should remain rather stable (breakeven WTI prices for US Oil are 65 a barrel), 2. if needed the company can reduce inventory levels, acting as a countercyclical measure, 3. the oil glut can lead to depressed valuations of target companies, leading to immediately accretive acquisitions if management behaves opportunistically, 4. diversified customer base should limit impact somewhat..

 

Like LWC mentioned, there are good business in bad industries, and we think both MRC and DNOW will emerge as the dominant players in the industry (they already control /- 40% of the distribution market). The part of the market going through distribution is around 20 billion, with runner-ups below 10% market share so there is plenty of opportunity, especially with a pristine balance sheet. The competitive advantage of having a dense and broad network is one of the main reasons we like the hourglass model.

 

In addition, these distributors are no longer merely supplying the goods, if you take a look at their "supply chain locations" you get a sense of the value added they provide. These locations are integrated in the customer's facilities and provide on-site service, quick delivery & servicing, reduced complexity of operations, and lower investment in inventory for the company (something that will become increasingly important if these oil companies start struggling). Other services include, supplier registration & verification (preferred supplier lists, just in time delivery ,testing, technical assistance, and so on...)

 

Despite the current oil glut, if you look 5 years out we believe there is no doubt that "global procurement" from the large IOCs will prove to be a significant tailwind for the main players in the distributor market. There is ongoing consolidation at the customer side so distributors have to go along and provide a global offering (need balance sheet to support SKU's and have a large network).

 

I went through the VIC writeup and I guess this is what makes a market? In terms of efficiency comparison, if you take the operating efficiency ratio (gross profit over opex) you are looking at 1.6x for DNOW, which is above the average for industrial distributor peers (1.58x). At 8% EBITDA this would be 1.8x or something.. MRC is currently at 1.7ish. Also, I can't seem to find that they are compensated on EBITDA measures unless this is implied by the return on capital measure..

 

For financials, you can fool around with Lowlights numbers for but let's say they spend their 750 mn of revolver at an average EBITDA multiple of 7x, which means around EBITDA 100 mn extra.

 

If you take organic revenue growth 0% for next 2 years but improvements in margin from integration completion, you get to revenues 4.2 bn @ 6%, = 252 mn EBITDA + an additional 100 from acquisitions, gives you 352 EBITDA in 2016, at 12x = 4.2 bn - 5 debt = 3.7 mcap = 35 per share. Divided by the current price this should give you a nice IRR.

 

[frommi]

When they lever up to the level of MRC, wouldn`t it be fair to only assume that the market will place the same multiple on DNOW than? At 8x EV/EBITDA and 352 EBITDA that gives a mcap of 2.8 bn = 25.9$. So it looks like the market is already factoring this into the price relative to MRC. I don`t say this its expensive and when you want to buy a good business at a fair price than probably the current price is not bad. I always request a big margin of safety, so i pass for now. If there would be a lot of insider buying at current prices i would be a lot more interested.

[Phaceliacapital]

You may be right, but we don't think 8x is an appropriate multiple for MRC or DNOW.

[frommi]

http://www.reuters.com/article/2014/12/10/capex-crude-idUSL3N0TU3SN20141210

 

So oil capex forecast for 2015 vs. 2014 is -20% to -40% and that is probably the reason for why MRC/DNOW are down by that amount. I have not idea by now if this gets better after 2015 and i think its too early to make an assumption for 2016/2017, but i don`t see how the market is mispricing this company based on what is knowledgable.

[Phaceliacapital]

Yes, capex forecasts are down and actual capex should normally also be down in 2015 (and maybe even 2016). With the firepower available on the balance sheet we view this as an opportunity for the company to go out there and take over companies at some multiple of depressed earnings. Thanks to the hourglass business model this improves the company's market position (as well as MRC's position as the sector becomes more oligopolistic) and should lead to a rerating in the market.

 

In the long run, we are more than happy to own the #1 or #2 distributor in almost any industry (look at Patterson/Henry Schein, Brenntag or Fastenal) and once the O&G industry picks up again the market will realize the value of owning the better franchise distributor in the sector. Upside from rerating (better industry economics and perhaps accretion from acquisitions) + improved earnings once the O&G industry stabilizes (+ move towards global procurement).

[Lowlight]

Phaceliacapital - do you see DNOW's plan to increase their market share in the industrial distribution space as likely or possible?  From a margin perspective it seems like this would allow them to enter into a larger market with better overall margins (at least that is what I would assume looking at Fasetnal's income statement).  I can see this as an argument for margin expansive if they were to persue it but I don't have enough industry knowledge to determine whether it is a good strategy or likely to succeed. 

 

Also, I would be interested on your take as to whether MRC's balance sheet will hinder them in making future acquisitions.  Their recent presentations show debt levels above their target levels which leads me to favor DNOW.  But you make a good point about owning both given the expected consolidation and future industry dynamics in an oligopolistic scenario.  Would just like to hear your thoughts on their capacity to acquire in this environment. 

[Guest notorious546]

alan mecham added to his position in q414, looks like an ~8% position now.

 

I finished reading the initial disclosure document this morning and was surprised at the amount of "recurring" revenue they had if i remember properly about half of it in one of its divisions. I'd expect that number to drop regardless of how the classify it given the large amount of reductions in spending we are seeing in the industry.

 

on slide 30 of their last presentation, they highlight run-rate maintenance capex of ~10-20 million. is that just absurdly low or am i missing something? it could just be for a particular department/segment of the company?

[merkhet]

One thing to note about this roll-up.

 

If you buy a company at 7x EBITDA that has a 6% margin and thereafter are able to squeeze an 8% margin out of the company, then you've moved from a 14% EBITDA return to a 19% EBITDA return on capital deployed.

 

That's pretty decent. If you then start thinking about whether they could get a depressed multiple (maybe 6x EBITDA in these conditions) that is also off of a depressed margin and/or revenue base, then this starts to get mighty interesting real fast.

[Guest roark33]

They haven't seem to be able to get to the 8% ebitda margin themselves, so I am not sure if they can do it for the targets?

[Phaceliacapital]

Phaceliacapital - do you see DNOW's plan to increase their market share in the industrial distribution space as likely or possible?  From a margin perspective it seems like this would allow them to enter into a larger market with better overall margins (at least that is what I would assume looking at Fasetnal's income statement).  I can see this as an argument for margin expansive if they were to persue it but I don't have enough industry knowledge to determine whether it is a good strategy or likely to succeed. 

 

Also, I would be interested on your take as to whether MRC's balance sheet will hinder them in making future acquisitions.  Their recent presentations show debt levels above their target levels which leads me to favor DNOW.  But you make a good point about owning both given the expected consolidation and future industry dynamics in an oligopolistic scenario.  Would just like to hear your thoughts on their capacity to acquire in this environment.

 

First of all, Fastenal operates a slightly different operating model than DNOW. For those interested, the main difference is in the breadth of their network in terms of local stores. They have around 2700+ stores (and think there is room for 3500), Grainger is one of the few with a "comparable" breadth with around 800 stores. DNOW for instance has only 330 locations.

 

That being said, the industrial space is still really fragmented. While I consider Fastenal as one (and maybe the best) distributors in the space, even this company only generates 3bn of revenues, while it is targeting an MRO market that is estimated at 160 bn. My guess that DNOW would further enter the industrial distribution would not be much better than a monkey flipping a coin, so I'm afraid I cannot help you there. I do believe that margin expansion (especially from today's levels) towards 7% is not impossible.

 

On your second question, yes, it does impact their opportunity for further acquisitions, this is something they mentioned on their last earnings call where they clearly stated that no substantial acquisitions are to be expected in 2015. DNOW on the other hand still has 1 bn cash at hand.

 

alan mecham added to his position in q414, looks like an ~8% position now.

 

I finished reading the initial disclosure document this morning and was surprised at the amount of "recurring" revenue they had if i remember properly about half of it in one of its divisions. I'd expect that number to drop regardless of how the classify it given the large amount of reductions in spending we are seeing in the industry.

 

on slide 30 of their last presentation, they highlight run-rate maintenance capex of ~10-20 million. is that just absurdly low or am i missing something? it could just be for a particular department/segment of the company?

 

So the recurring part that you are talking about is mainly their MRO business, and the company calls it recurring as this is more an OpEx type of expense than a CapEx type of expense. We assess this as slightly more resilient revenue, unfortunately we have not found data to determine how resilient MRO revenues were in 2009.. Something we will find out in 2015. #1 peer MRC does not disclose MRO revenue in its financials.

 

In terms of capex, there actually is almost no capex in this business, you need a central HQ for admin, payroll etc and then you open up a local branch where the client needs you and you leverage the fixed cost from your HQ. These local branches are typically leased (and more and more found on the property of the client to ensure quick delivery). There is no high capex involved. You have some inventory buildup as you grow but this can be reversed in terms of slow, zero or negative demand growth (MRC has noted that they will generate 200 mn from inventory management). MRC's global capex is also in the USD 20 mn levels I think.

 

One thing to note about this roll-up.

 

If you buy a company at 7x EBITDA that has a 6% margin and thereafter are able to squeeze an 8% margin out of the company, then you've moved from a 14% EBITDA return to a 19% EBITDA return on capital deployed.

 

That's pretty decent. If you then start thinking about whether they could get a depressed multiple (maybe 6x EBITDA in these conditions) that is also off of a depressed margin and/or revenue base, then this starts to get mighty interesting real fast.

 

Exactly, in the last earnings call management noted that certain parties who were laughing their offers off the table are now calling back to see if the deal is still available. Despite the negative sentiment we still believe that there still is loads of opportunity with the smaller players who cannot leverage benefits from being in a larger network. For instance, inventory benefits where you as a mom & pop shop are sitting on your inventory while a facility that is part of a network can still sell its inventory to facilities within the network that are continuing to deliver on certain projects.

 

They haven't seem to be able to get to the 8% ebitda margin themselves, so I am not sure if they can do it for the targets?

 

Well I would eat my hat if a company could generate 8% EBITDA margins on declining revenues and still facing one offs from ERP integration and temporary outsourced job because of the spinoff. The 8% is a LT goal and now probably even longer LT, 7% should be manageable in 2-3 years. (but I am probably wrong as estimates typically are).

[MrB]

Phaceliacapital - do you see DNOW's plan to increase their market share in the industrial distribution space as likely or possible?  From a margin perspective it seems like this would allow them to enter into a larger market with better overall margins (at least that is what I would assume looking at Fasetnal's income statement).  I can see this as an argument for margin expansive if they were to persue it but I don't have enough industry knowledge to determine whether it is a good strategy or likely to succeed. 

 

Also, I would be interested on your take as to whether MRC's balance sheet will hinder them in making future acquisitions.  Their recent presentations show debt levels above their target levels which leads me to favor DNOW.  But you make a good point about owning both given the expected consolidation and future industry dynamics in an oligopolistic scenario.  Would just like to hear your thoughts on their capacity to acquire in this environment.

 

First of all, Fastenal operates a slightly different operating model than DNOW. For those interested, the main difference is in the breadth of their network in terms of local stores. They have around 2700+ stores (and think there is room for 3500), Grainger is one of the few with a "comparable" breadth with around 800 stores. DNOW for instance has only 330 locations.

 

That being said, the industrial space is still really fragmented. While I consider Fastenal as one (and maybe the best) distributors in the space, even this company only generates 3bn of revenues, while it is targeting an MRO market that is estimated at 160 bn. My guess that DNOW would further enter the industrial distribution would not be much better than a monkey flipping a coin, so I'm afraid I cannot help you there. I do believe that margin expansion (especially from today's levels) towards 7% is not impossible.

 

On your second question, yes, it does impact their opportunity for further acquisitions, this is something they mentioned on their last earnings call where they clearly stated that no substantial acquisitions are to be expected in 2015. DNOW on the other hand still has 1 bn cash at hand.

 

alan mecham added to his position in q414, looks like an ~8% position now.

 

I finished reading the initial disclosure document this morning and was surprised at the amount of "recurring" revenue they had if i remember properly about half of it in one of its divisions. I'd expect that number to drop regardless of how the classify it given the large amount of reductions in spending we are seeing in the industry.

 

on slide 30 of their last presentation, they highlight run-rate maintenance capex of ~10-20 million. is that just absurdly low or am i missing something? it could just be for a particular department/segment of the company?

 

Yes I'm interested. Mind expanding on that please? FAST v DNOW and maybe also Grainger v DNOW.

Thanks!

[KCLarkin]

Any news causing today's drop?

[philly value]

Any news causing today's drop?

 

producer prices + oil down?

[mateo999]

Any news causing today's drop?

 

producer prices + oil down?

 

heard CS was trying to place a 4mm share block at a slight discount to yesterday's close.

[Guest roark33]

Yeah, I posted about a secondary, but then didn't see anything in the filings.  I think that was the case, but I am not exactly sure why it hasn't been published yet...

[ZenaidaMacroura]

Any news causing today's drop?

 

producer prices + oil down?

 

heard CS was trying to place a 4mm share block at a slight discount to yesterday's close.

any source yet?

[Guest notorious546]

In the initial write-up, you highlighted that ~50% of revenues are maintenance, repair and operations etc. looking at slide 7 of their February presentation it looks like 22%. I am wondering what other products you included in that number and why?

 

In the company’s q4/14 conference, call management highlighted that revenues are tied to global rig count, which many of you have highlighted seems to keep coming down. Just for a potential scenario for 2015, let’s assume a decline in global rig count of ~25% for the full year. Applying historical revenues per rig at 1.0 million to 1.3 million we get a range of revenues of ~2.5 to 3.5 billion. Apply a 6% EBITDA margin (~25% below management target of 8% but still above recent levels) we get EBITDA of ~150 to 200 million. If working capital decreases to the 25% range from 34% at Q4/14 ROIC's will improve. I think the could generate fcf in the 75 million to 100 million dollar range in 2015.

 

Here's my favorite line from the q4/14 conference call.

 

I have seen some of my predecessors -- to try to manage earnings any given quarter and not for the long-term -- I have seen them devastate our operations. I mean, I've seen them cut over half of our branches in some of these core areas and that cost us a lot more than losing money in a quarter or two. Because we had to go back and make huge acquisitions to regain that share. So we will manage our expenses down as stringently as we can in all areas, but the last thing we are going to do is sacrifice our future.

2015-02-23_DNOW_Q414_Transcript.pdf

[KCLarkin]

I am not sure 6% margin on 2.5-3.5b revenue is realistic, given the operating leverage.

[Guest notorious546]

I am not sure 6% margin on 2.5-3.5b revenue is realistic, given the operating leverage.

 

what do you think is a reasonable range?

[MrB]

I am not sure 6% margin on 2.5-3.5b revenue is realistic, given the operating leverage.

 

what do you think is a reasonable range?

 

I looked at the various companies in the distribution/supply chain management space and 6% seems reasonable to me. I think part of the thesis here is that Peter Miller can get that margin up to 8% and maybe even higher. For a conservative approach 6% might be on the high side, but not out of the ball park.