DNOW - DistributionNow

[Jurgis]

Anyone know what's behind today's drop?

 

Oilco prices are melting down together with oil again.

[AzCactus]

Anyone know what's behind today's drop?

 

Oilco prices are melting down together with oil again.

 

Jurgis---the funny thing is that oil being down is good for these guys.  It allows them to more cheaply acquire companies which they have mentioned is a key part of their growth strategy. 

[Jurgis]

Jurgis---the funny thing is that oil being down is good for these guys.  It allows them to more cheaply acquire companies which they have mentioned is a key part of their growth strategy.

 

Maybe. Doesn't help their existing business though.

[AzCactus]

Jurgis---the funny thing is that oil being down is good for these guys.  It allows them to more cheaply acquire companies which they have mentioned is a key part of their growth strategy.

 

Maybe. Doesn't help their existing business though.

 

True, but I think any business that has a longer term perspective will have an ability to make accretive acquisitions.  I think it's worth remembering that the largest guy in this space, MRC has a balance sheet that is much more levered that DNOW's. 

[Homestead31]

just a few quick thoughts on the ROE / book value argument above, which while it is a useful framework, is getting a bit "man with a hammerish."

 

it is important to keep in mind that this is an asset light business.  the business is based on a system of warehouses shipping product to customers.  the beauty of this is that once a warehouse is built and up to speed, it costs very little to keep it going.

 

think of it this way... lets say it takes $10M that is capitalized to the balance sheet to get a warehouse up and running, and lets say that in year one that warehouse produces $300k in NI for an ROE of 3%.  Not very impressive, right?

 

Now consider that the warehouse will be depreciated every year, reducing its balance sheet value.  For the purposes of this illustration, lets say it is depreciated over 10 years.  That means that if there are no increases in volumes, no increases in pricing, and no increases in margins, ROE as defined by the balance sheet will have doubled to 6%.

 

In the case of DNOW, in my view it is very likely that over the next 5 years or so that volumes will increase, pricing will increase, and margins will increase.  The balance sheet value won't be depreciated as quickly as in the illustrative example above, but the point remains that due to GAAP rules the assets will be "worth less" on the balance sheet, even though in the real world they will be able to produce more NI.  That process will drive ROE to a level that you are more comfortable with than today's level.

[KCLarkin]

In the case of DNOW, in my view it is very likely that over the next 5 years or so that volumes will increase, pricing will increase, and margins will increase.  The balance sheet value won't be depreciated as quickly as in the illustrative example above, but the point remains that due to GAAP rules the assets will be "worth less" on the balance sheet, even though in the real world they will be able to produce more NI.  That process will drive ROE to a level that you are more comfortable with than today's level.

 

Actually, a distributor's tangible book value is Inventory and Receivables. For DNOW, PPE is immaterial. To make an above average ROE, DNOW needs to increase margins and improve inventory turnover. The ROE question is essential to this investment. If DNOW can earn ROEs similar to the industrial distributors, the bulls are right. If DNOW earns ROE similar to MRC's history, then it might be worth 1 to 1.5x book at most.

 

This is why the stock is so volatile even though the underlying business is very safe. There is a very large short interest that is betting this company is only worth book value, which is rapidly shrinking.

 

[gym97]

To me, I take the Bruce Greenwald logic whereby you determine the competitive advantage to figure out if the company deserves a higher ROE. If you think they have a competitive advantage, they will earn above their cost of capital.

 

Do they have power over their suppliers? Well their suppliers are competing directly against you so no. I'll give them credit for being able to exert buying power over smaller and medium-sized suppliers so B+ grade.

 

Do they have buyer power? Well, judging by their gross margins, no. I give them a C- grade. I will upgrade them to a A- if they can show that supply chain branches have much better returns relative to normal branches but I don't think this is the case as they are heavily  negotiated arrangements.

 

Are their barriers to entry? ERP and scale are barriers but small players can compete effectively during good times. During good times, proximity and availability is all that matters and ERP integration seems to just go out the door. Nobody cares about that stuff when oil is at $150. I give them a B- grade although I think this point is where I'm most likely to be wrong. If ERP and scale drive value for their customers, the industry may consolidate as smaller competitors struggle to compete even as oil prices recover.

 

Are there substitutes? Well if distribution is the product, the substitute is buying direct.

 

What about the market structure? Well during bad times, your competitors liquidate inventory bringing deflation to the entire industry.

 

When it is all said and done, I'm not sure the competitive dynamics really justify this company having an above average ROE. This is a cyclical business so when considering the average ROE, you have to factor in that over the cycle, they will earn below their cost of capital for a few years.

 

I like the management and like the capital structure and when it is all said and done, this may be a slightly above average business but I don't think there are any convincing reasons why this stock at this price is a home run. I think you will get a pickup when oil prices recover but there are other ways to play the oil recovery.

 

[AzCactus]

So lets assume that this business is capable of $3 Billion in revenue.  Management has a goal of 8% EBITDA, but let's assume 6% which in a more normalized environment ought to be realistic.  This is $180 MM. A business with above average management with a great balance sheet (which based on past experience in likely towards the bottom of the cycle) ought to be worth 13-14 X is around $2.4 Billion.  This is around 20-25% higher than current price.  Additionally, I think that down the road when the market recovers their revenue will increase and management might hit that 8% goal. 

[Sionnach]

Yeah I agree Dshachory. I think the question is how long it will take to get there. I think they said they won't even get to positive ebitda until Q2 2016.

 

In terms of ROE, won't the ROE improve once they get levered up? Obviously this isn't the ideal way to improve ROE, but I think I remember them saying they could get to 2-3x ebitda (I could be wrong on that). Just shifting the capital structure to a more appropriate level should boost ROE.

[AzCactus]

Yeah I agree Dshachory. I think the question is how long it will take to get there. I think they said they won't even get to positive ebitda until Q2 2016.

 

In terms of ROE, won't the ROE improve once they get levered up? Obviously this isn't the ideal way to improve ROE, but I think I remember them saying they could get to 2-3x ebitda (I could be wrong on that). Just shifting the capital structure to a more appropriate level should boost ROE.

 

Sion- I don't recall seeing 2-3x ebitda, although is memory holds mrc is around 4x.  I recall them saying that q2 16 they would be ebitda positive so I don't know if the numbers I mention will be positive in 16 or 17.  However, if management makes smart acquisitions and integrates them effectively I think we will see a very good company coming out of this oil situation. 

[rkluwer]

Form 8-K for NOW INC.

 

--------------------------------------------------------------------------------

 

24-Dec-2015

 

Entry into a Material Definitive Agreement, Financial Statements and Exhibits

 

 

 

Item 1.01. Entry into a Material Definitive Agreement. 

As of the fiscal quarter ending December 31, 2015, NOW Inc. (the "Company") may not be able to comply with the interest coverage ratio covenant (the "Potential Default") in its Credit Agreement dated as of April 18, 2014 (the "Credit Agreement"). On December 18, 2015, the Company entered into a waiver (the "Waiver") to the Credit Agreement pursuant to which the lenders thereto agreed, among other things, to waive until January 31, 2016 the Potential Default and to permit the Company to continue to borrow under the Credit Agreement. The Company has commenced discussions with its lenders under the Credit Agreement to enter into an amendment to the Credit Agreement (the "Amendment"), which would replace the interest coverage ratio covenant with an asset based coverage test and security interests in certain Company assets. There can be no assurances that the Amendment will be entered into on or before January 31, 2016 or at all.

-------------------------------------------------------------------------------------------------------------------------------

 

I guess this means, that under current conditions the can't use there credit's in the way the might have intended or ?

 

This weakens DNOW's oppertunities to do more M&A at the moment, when great bargains are around or how do u guyes see it ??

 

DNOW have always said to have great balance sheets and been able to capatilize on this, but does this show the are in a worse situation then markets think or ?

[arcube]

Form 8-K for NOW INC.

 

--------------------------------------------------------------------------------

 

24-Dec-2015

 

Entry into a Material Definitive Agreement, Financial Statements and Exhibits

 

 

 

Item 1.01. Entry into a Material Definitive Agreement. 

As of the fiscal quarter ending December 31, 2015, NOW Inc. (the "Company") may not be able to comply with the interest coverage ratio covenant (the "Potential Default") in its Credit Agreement dated as of April 18, 2014 (the "Credit Agreement"). On December 18, 2015, the Company entered into a waiver (the "Waiver") to the Credit Agreement pursuant to which the lenders thereto agreed, among other things, to waive until January 31, 2016 the Potential Default and to permit the Company to continue to borrow under the Credit Agreement. The Company has commenced discussions with its lenders under the Credit Agreement to enter into an amendment to the Credit Agreement (the "Amendment"), which would replace the interest coverage ratio covenant with an asset based coverage test and security interests in certain Company assets. There can be no assurances that the Amendment will be entered into on or before January 31, 2016 or at all.

-------------------------------------------------------------------------------------------------------------------------------

 

I guess this means, that under current conditions the can't use there credit's in the way the might have intended or ?

 

This weakens DNOW's oppertunities to do more M&A at the moment, when great bargains are around or how do u guyes see it ??

 

DNOW have always said to have great balance sheets and been able to capatilize on this, but does this show the are in a worse situation then markets think or ?

 

rkluwer - What is the LTD on the books and the available cash? I am getting some different numbers. Thanks.

[rkluwer]

Only thing i was pointing out was - that this might put a few obstacles infront of DNOW, if the where to use these credits. but agreed, there Cash on hand and assets shouldn't be affected. The probabaly have seen this situation comin, and done the Work to put them selves in a situation where new credit covernants should be in place soon.

[AzCactus]

Here's an interview with Robert Worman (CEO):

 

http://news.google.com/news/url?sa=T&ct2=us&fd=S&url=http://www.fool.com/investing/general/2016/01/09/distribution-now-inc-ceo-robert-workman-sits-down.aspx&cid=52779026401030&ei=YQuVVuDRBMi1iQK4wL-QCQ&usg=AFQjCNFlzrYH-UrBYOwPTUm-Mr_mwoTHNw

[Sionnach]

Here's an interview with Robert Worman (CEO):

 

http://news.google.com/news/url?sa=T&ct2=us&fd=S&url=http://www.fool.com/investing/general/2016/01/09/distribution-now-inc-ceo-robert-workman-sits-down.aspx&cid=52779026401030&ei=YQuVVuDRBMi1iQK4wL-QCQ&usg=AFQjCNFlzrYH-UrBYOwPTUm-Mr_mwoTHNw

 

Nice find. Thanks Dshach

[MrB]

Here's an interview with Robert Worman (CEO):

 

http://news.google.com/news/url?sa=T&ct2=us&fd=S&url=http://www.fool.com/investing/general/2016/01/09/distribution-now-inc-ceo-robert-workman-sits-down.aspx&cid=52779026401030&ei=YQuVVuDRBMi1iQK4wL-QCQ&usg=AFQjCNFlzrYH-UrBYOwPTUm-Mr_mwoTHNw

 

+1

 

Workman: So I would say there's four things you should hold our feet to the fire about, OK? One is are we growing share organically? So that's why on our call, I call out what's revenue per rig without acquisitions and what is it with acquisitions. Because the minute we get into having to buy revenue growth, you know you've got some problem. It doesn't mean every single quarter we're going to grow organically, but we need to have a trend that says we're growing organically.

 

 

Two is are we, regardless of what's going on in the market, are we managing our P&L in a way that we're improving all of our ratios whether it's EBITDA margins or net income or whatever. Three, working capital. This business is biggest risk in the world is working capital. Okay? That's it. I don't need, I don't have much capital employed in this business other than the receivables and inventory. And so how we manage our working capital as percent of our revenue is really important.

 

 

And fourth, you know a big part of our story is the fact that we have a super clean balance sheet and we're going to allocate capital for M&A and are we allocating it consistent with our strategy that we've communicated to the whole investing public and are we doing it wisely with discipline. That's the four things I would watch on us.

[AzCactus]

I was pretty impressed with him.  He sounds level headed and understands the importance of not overpaying for acquisitions. 

[nafregnum]

http://www.gurufocus.com/news/383723/now-inc-could-be-multibagger-over-next-decade

 

Above is a nice review of the positives for DNOW.  It points out Bruce Berkowitz's Fairholme started a position with 6.7M shares last quarter.  Allan Mecham added to his position last quarter too, currently showing 5.5M shares after adding 50% in Q3's 13F filings.

 

I remember being impressed by CEO Robert Workman while listening to the earnings call two quarters ago -- there must have been others impressed by him listening in because DNOW showed a lot of strength in the weeks after that call.  He did something classy too, he praised the dedication of a long time employee at Wilson for reaching something like her 20th anniversary with the company.

 

 

[jay21]

Both DNOW and MRC are ~TBV right now I think, which makes them interesting. Although, I am not sure about the upside. If everything goes right and rig count comes completely back and margins expand, this might only double. And thats very blue sky to the point of not being realistic.

 

I think this might be worth ~$20 + a small premium for upside optionality in the form of M&A.

 

Anyone have an idea of normalized earnings or rig count?

[rishig]

Form 8-K for NOW INC.

 

--------------------------------------------------------------------------------

 

24-Dec-2015

 

Entry into a Material Definitive Agreement, Financial Statements and Exhibits

 

 

 

Item 1.01. Entry into a Material Definitive Agreement. 

As of the fiscal quarter ending December 31, 2015, NOW Inc. (the "Company") may not be able to comply with the interest coverage ratio covenant (the "Potential Default") in its Credit Agreement dated as of April 18, 2014 (the "Credit Agreement"). On December 18, 2015, the Company entered into a waiver (the "Waiver") to the Credit Agreement pursuant to which the lenders thereto agreed, among other things, to waive until January 31, 2016 the Potential Default and to permit the Company to continue to borrow under the Credit Agreement. The Company has commenced discussions with its lenders under the Credit Agreement to enter into an amendment to the Credit Agreement (the "Amendment"), which would replace the interest coverage ratio covenant with an asset based coverage test and security interests in certain Company assets. There can be no assurances that the Amendment will be entered into on or before January 31, 2016 or at all.

-------------------------------------------------------------------------------------------------------------------------------

 

I guess this means, that under current conditions the can't use there credit's in the way the might have intended or ?

 

This weakens DNOW's oppertunities to do more M&A at the moment, when great bargains are around or how do u guyes see it ??

 

DNOW have always said to have great balance sheets and been able to capatilize on this, but does this show the are in a worse situation then markets think or ?

 

I have owned this (too early) and as I have followed the company, I have found their statements to be a bit too promotional. Anyway, they were able to get the waiver. Here is the amendment announcement (they got rid of interest coverage covenant given how unprofitable they are today):

 

Credit Facility Background:

 

DNOW has a $750 million Revolving Credit Facility expiring in April 2019. This Credit Facility is with eleven banks with Wells Fargo Bank as the Agent.

Our original Credit Agreement had two financial covenants: 1) a Leverage test (Maximum Total Capitalization Ratio), where DNOW’s debt could not exceed 50% of capitalization; 2) a Coverage test (Minimum Interest Coverage Ratio), where DNOW’s earnings had to be at least 3X DNOW’s interest expense owed to the banks.

Regarding the Amendment:

 

On December 18, 2015, the bank group executed a waiver of the December 31, 2015 Minimum Interest Coverage Ratio financial covenant until January 31, 2016.

On January 20, 2016, DNOW entered into an Amendment to its Credit Agreement, where the Minimum Interest Coverage Ratio is suspended as of December 30, 2015. 

We can later elect to reinstate the Minimum Interest Coverage Ratio.

We added a Minimum Asset Coverage Ratio (Asset Coverage Ratio is the ratio of Eligible Assets to Debt, and we must cover Debt 1.5x).

Eligible Assets include all Cash, US AR, Inventory and Fixed Assets, and Canadian AR and Inventory

Until we return to profitability, we can borrow up to 75% of our Eligible Assets (Equal to $562.5 million).  Once consistently profitable, we will have access to the full $750 million. At that time, we can drop the monthly asset reporting requirements.

The amendment reduced the Maximum Total Capitalization Ratio from 50% to 45%.

We provide security interest in essentially all US assets, and in approximately 65% of the equity interests in our first-tier foreign subsidiaries.

Our current borrowing costs increase 75 basis points (LIBOR borrowings spread from 1.50% to 2.25%.  Base Rate (Prime) borrowings from .50% to 1.25%).

Commitment Fee increased 5 basis points (from 25 bps to 30 bps).

Based on the Amendment, we are in compliance with all financial covenants.

Facility commitments remain at $750 million.

The $250 million accordion remains.

Facility still expires in April 2019.

An 8-K was filed January 21, 2016 relative to the Amendment.

We view this structure as less onerous than Asset Based Lending Facilities (which are common in the distribution industry).

The above summary is not complete and is qualified in its entirety by reference to the full text of the Amendment No. 1 to our Credit Agreement and the related Pledge and Security Agreement, each of which is filed as an exhibit to our Current Report on Form 8-K filed on January 21, 2016.  Capitalized terms used above are defined in the Credit Agreement, as amended.

 

 

[Swami X]

 

Does anyone have access to transcripts for any of the FY2014 quarters? I'd appreciate it.

 

Thanks much.

[mateo999]

 

Does anyone have access to transcripts for any of the FY2014 quarters? I'd appreciate it.

 

Thanks much.

Q4_14.pdf

Q3_14.pdf

Q2_14.pdf

[Swami X]

 

Does anyone have access to transcripts for any of the FY2014 quarters? I'd appreciate it.

 

Thanks much.

 

Mateo - thank you very much.

[Phaceliacapital]

Apparently Fairholme want(ed) to merge DNOW & MRC..

 

http://www.businesswire.com/news/home/20160223005481/en/Announces-Fourth-Quarter-Full-Year-2015-Results

 

HOUSTON--(BUSINESS WIRE)--NOW Inc. (NYSE: DNOW) reported for its fourth quarter ended December 31, 2015 a net loss of $249 million, or $2.33 per fully diluted share, compared to net income of $16 million, or $0.14 per fully diluted share in the same period of 2014. Excluding other costs, net loss was $27 million or $0.25 per fully diluted share. Other costs in the fourth quarter of 2015 included a pre-tax non-cash impairment charge of $138 million associated with the fair value of goodwill, $3 million in acquisition-related and severance charges and an after-tax charge of $129 million related to a deferred tax asset valuation allowance.

[skanjete]

Apparently Fairholme want(ed) to merge DNOW & MRC..

 

http://www.businesswire.com/news/home/20160223005481/en/Announces-Fourth-Quarter-Full-Year-2015-Results

 

HOUSTON--(BUSINESS WIRE)--NOW Inc. (NYSE: DNOW) reported for its fourth quarter ended December 31, 2015 a net loss of $249 million, or $2.33 per fully diluted share, compared to net income of $16 million, or $0.14 per fully diluted share in the same period of 2014. Excluding other costs, net loss was $27 million or $0.25 per fully diluted share. Other costs in the fourth quarter of 2015 included a pre-tax non-cash impairment charge of $138 million associated with the fair value of goodwill, $3 million in acquisition-related and severance charges and an after-tax charge of $129 million related to a deferred tax asset valuation allowance.

 

Phaceliacapital,

 

Where did you find the information about Fairholme?