KLXI - KLX Inc.

[valuedontlie]

There have been snippets on this company but figured it should get its own thread.

 

Anyone looked at this name? I understand it doesn't get a lot of love after the company recently built up an energy services business. The way I see it, at $38/share you are paying 10x trailing aerospace distribution EBITDA of $277m (i.e. no credit for energy services). This is an identical multiple to competitor WAIR.

[valuedontlie]

Today's conference presentation is worth listening to:

http://investor.klx.com/phoenix.zhtml?p=irol-eventDetails&c=253840&eventID=5184149

 

CEO saying there will be a once in a generation opportunity for acquiring mom & pop energy services businesses. Customers will need to learn how to be profitable at $50/bbl which offers up entirely new opportunities for service providers.

 

Naturally 2H15 will tough but aerospace business (~75% of KLXI) performing well.

[Liberty]

I know almost nothing about it, but had a quick look. Certainly a good sign that the management of BEAV jumped ship (almost a textbook Greenblatt thing), but I'm not a huge fan of distribution businesses. Middlemen isn't the best place to be in the value chain, IMO.

 

On the energy side, management certainly said some of the right things (I listened to about the first 20 minutes of the presentation this morning), but I have no ability to predict energy prices, and if I wanted to play that rebound, I'm not sure which company would be best positioned to do that. Maybe this is cheap enough that you get the energy upside for free, I don't know.

 

But that was just my uninformed 2 cents CAD.

[oddballstocks]

This is a nitpick and I'm sorry in advance, but I feel it's necessary to state this.

 

I don't read all the threads in this board and this appears to be ripped out of some thread I've never seen.  I have no idea what KXLI is or what the context is.  What do they do?  Why are they attractive?  Is this something I should be looking at, or just a thread for other shareholders to discuss?

 

Maybe I'm just coming into a conversation I don't belong in and that's why I'm confused.  It would be helpful to see something like this:

 

"KXLI is a warehouse company in Texas.  They distribute widgets to widget companies.  They've been buying back their stock and trade at 10x FCF compared to 20x FCF of their competitors."

 

No need to write a dissertation, just a simple sentence for context.

[Liberty]

That's fair. I didn't start the thread, but the quick version (from memory, I could be making mistakes) is:

 

KLXI is a spinoff from B/E Aerospace (BEAV). The CEO and CFO are going with the spinoff (maybe more of management).

 

They are basically 75% the distribution/consumables aero business from BEAV and the rest is an energy service business.

 

KLX Inc. is the distributor and service provider of aerospace fasteners and consumables. The Company offers ranges of aerospace hardware and consumables, and inventory management services across the world. The Company operates in two segments: Aerospace Solutions Group (ASG) segment and Energy Services Group (ESG) segment. Its customers include oil and gas companies that are engaged in the exploration, and production and development of oil and gas properties. The Company through its network and information technology systems offer services to commercial airliners, business jet and defense original equipment manufacturer (OEMs) and its subcontractors, airlines, and maintenance, repair and overhaul (MRO) operators. The Company provides access to over one million stock keeping unit (SKUs). Its systems support both internal distribution processes, along with customer services, including just-in-time deliveries and kitting solutions.

 

It seems cheap on a FCF multiple basis, but obvious the energy business will face hard times ahead, and competitors like Wesco aren't getting big multiples either. As I said above, I'm not a big fan of this part of the value chain, but some people really like it (FAST has big fans, obviously).

 

I wish I could say more about it, but as I said, I just had a quick look. What I saw didn't impress me enough for me to keep going much further, though I plan to keep an eye on it.

[oddballstocks]

That's fair. I didn't start the thread, but the quick version (from memory, I could be making mistakes) is:

 

KLXI is a spinoff from B/E Aerospace (BEAV). The CEO and CFO are going with the spinoff (maybe more of management).

 

They are basically 75% the distribution/consumables aero business from BEAV and the rest is an energy service business.

 

KLX Inc. is the distributor and service provider of aerospace fasteners and consumables. The Company offers ranges of aerospace hardware and consumables, and inventory management services across the world. The Company operates in two segments: Aerospace Solutions Group (ASG) segment and Energy Services Group (ESG) segment. Its customers include oil and gas companies that are engaged in the exploration, and production and development of oil and gas properties. The Company through its network and information technology systems offer services to commercial airliners, business jet and defense original equipment manufacturer (OEMs) and its subcontractors, airlines, and maintenance, repair and overhaul (MRO) operators. The Company provides access to over one million stock keeping unit (SKUs). Its systems support both internal distribution processes, along with customer services, including just-in-time deliveries and kitting solutions.

 

It seems cheap on a FCF multiple basis, but obvious the energy business will face hard times ahead, and competitors like Wesco aren't getting big multiples either. As I said above, I'm not a big fan of this part of the value chain, but some people really like it (FAST has big fans, obviously).

 

I wish I could say more about it, but as I said, I just had a quick look. What I saw didn't impress me enough for me to keep going much further, though I plan to keep an eye on it.

 

Exactly what I was looking for, thanks! 

[valuedontlie]

My mistake on the company background. Liberty's description fits the bill. Roughly 75/25 split between aerospace distribution (somewhat similar to FAST, GWW though without physical locations) and energy services (mostly an amalgamation of mom & pop service providers acquired).

 

At $40/share it's a $2.1bn market cap and $3bn EV. Aerospace did $280m in EBITDA last year (which historically converts at 60% to FCF) and energy services did $120m in EBITDA.

 

Energy EBITDA likely to fall 40-50% this year as service providers get hit. So all-in EBITDA could be in $360m range for 2015 or ~8.3x. Not ridiculously cheap but offers a good quality business in there as well. Alternatively if the energy business were self-sustaining from a CF perspective (CFO = capex) and aero converts at 60% that would get you somewhere between $165-175m in FCF on a $2.1bn company.

[Homestead31]

it is worth reading the WAIR thread if you're interested in KLXI.

 

ordinarily i actually love distribution businesses b/c they are low capex.  however, as was pointed out on the WAIR thread, aerospace distribution is tough to understand at the moment.  distributors are normally an important part of the supply chain for aerospace b/c the manufacturers don't want to tie up working capital in inventory due to the cyclical nature of the business.  however, given the current mega-cycle manufacturers are trying to cut the distributors out.  BA specifically is doing this by trying to amalgamate the parts needs of all of the component makers into one purchase order.  distribution also seems to be less valuable to the ecosystem when it is a "few to few" supply chain meaning there are a few people who make the parts (PCP and AA) and a few people who buy them (the plane manufacturers... you can argue it should really be the tier one guys, but again, see what BA is doing by trying to do the purchasing for the tier one suppliers).  contrast this to say food distribution where there are a bazillion suppliers and a bazillion buyers.  it makes sense to have a middle man under these circumstances.

 

all that being said, as i understand it, WAIR is very BA dependent, and KLXI is not.  it also may be worth noting that despite WAIR's recent problems, Makaira has just filed that they have added even more to their position.

[Chalk bag]

it is worth reading the WAIR thread if you're interested in KLXI.

 

ordinarily i actually love distribution businesses b/c they are low capex.  however, as was pointed out on the WAIR thread, aerospace distribution is tough to understand at the moment.  distributors are normally an important part of the supply chain for aerospace b/c the manufacturers don't want to tie up working capital in inventory due to the cyclical nature of the business.  however, given the current mega-cycle manufacturers are trying to cut the distributors out.  BA specifically is doing this by trying to amalgamate the parts needs of all of the component makers into one purchase order.  distribution also seems to be less valuable to the ecosystem when it is a "few to few" supply chain meaning there are a few people who make the parts (PCP and AA) and a few people who buy them (the plane manufacturers... you can argue it should really be the tier one guys, but again, see what BA is doing by trying to do the purchasing for the tier one suppliers).  contrast this to say food distribution where there are a bazillion suppliers and a bazillion buyers.  it makes sense to have a middle man under these circumstances.

 

all that being said, as i understand it, WAIR is very BA dependent, and KLXI is not.  it also may be worth noting that despite WAIR's recent problems, Makaira has just filed that they have added even more to their position.

 

Thx for pointing it out. I would add  that while KLXI emphasizes they are not tied to BA, it's a white lie in my opinion (they claim to be tied to parts manufacturers like HON). The big OEMs are partnering w/ the parts manufacturers to dis-intermediate distributors altogether. So if this becomes reality the OEM-parts business goes away as well.

[gym97]

I've looked at both companies before.

 

What I don't quite understand is why inventory (relative to revenue and cogs) have been coming down so much over the years.

 

My KLX data:

 

KLX 2009 2010 2011 2012 2013 2014

Revenue 798.5 778.4 947.3 1,180.7 1,268.0 1,579.0

% Growth - Organic -23.4% -2.5% 21.7% 24.6% 7.4% 24.5%

 

Inventory 852.0 1,000.9 1,014.4 1,201.8 1,226.7 1,298.0

% Revenue 106.7% 128.6% 107.1% 101.8% 96.7% 82.2%

# Days Inventory 576.9 715.8 582.3 545.9 527.3 433.0

 

My wesco data:

 

Wesco 2008 2009 2010 2011 2012 2013 2014

Revenue 604.3 612.7 656.0 710.9 776.2 901.6 1,355.9

% Growth 29.0% 1.4% 7.1% 8.4% 9.2% 16.2% 50.4%

 

Inventory 424.4 486.9 483.4 483.1 557.2 630.2 754.4

% Revenue 70.2% 79.5% 73.7% 68.0% 71.8% 69.9% 55.6%

# Days Inventory 445.5 462.2 429.7 396.2 404.7 389.4 287.2

 

I have inventory at 106% of revenue in 2009 coming down to 80% in 2014. I don't really know what inventory is before then because its hard to find a breakout of BEAV's inventory by division. If I were to make up a reason, I guess it would be that inventory was bloated during the financial crisis and they've worked their way down to more normalized levels. Or maybe their IT systems are now better at forecasting out inventory. I suspect the real reason is that Boeing/Airbus/Their Key Suppliers and PCP/Alcoa have become much better at talking to each other so the entire supply chain needs less inventory (and in a sense, needs less distributor). I am not entirely sure what the answer is.

[valuedontlie]

I've looked at both companies before.

 

What I don't quite understand is why inventory (relative to revenue and cogs) have been coming down so much over the years.

 

My KLX data:

 

KLX 2009 2010 2011 2012 2013 2014

Revenue 798.5 778.4 947.3 1,180.7 1,268.0 1,579.0

% Growth - Organic -23.4% -2.5% 21.7% 24.6% 7.4% 24.5%

 

Inventory 852.0 1,000.9 1,014.4 1,201.8 1,226.7 1,298.0

% Revenue 106.7% 128.6% 107.1% 101.8% 96.7% 82.2%

# Days Inventory 576.9 715.8 582.3 545.9 527.3 433.0

 

My wesco data:

 

Wesco 2008 2009 2010 2011 2012 2013 2014

Revenue 604.3 612.7 656.0 710.9 776.2 901.6 1,355.9

% Growth 29.0% 1.4% 7.1% 8.4% 9.2% 16.2% 50.4%

 

Inventory 424.4 486.9 483.4 483.1 557.2 630.2 754.4

% Revenue 70.2% 79.5% 73.7% 68.0% 71.8% 69.9% 55.6%

# Days Inventory 445.5 462.2 429.7 396.2 404.7 389.4 287.2

 

I have inventory at 106% of revenue in 2009 coming down to 80% in 2014. I don't really know what inventory is before then because its hard to find a breakout of BEAV's inventory by division. If I were to make up a reason, I guess it would be that inventory was bloated during the financial crisis and they've worked their way down to more normalized levels. Or maybe their IT systems are now better at forecasting out inventory. I suspect the real reason is that Boeing/Airbus/Their Key Suppliers and PCP/Alcoa have become much better at talking to each other so the entire supply chain needs less inventory (and in a sense, needs less distributor). I am not entirely sure what the answer is.

 

KLX has been acquiring oilfield services businesses over the past 2 years and WAIR acquired chemical distributor Haas Group in early 2014. These could have an impact on the trends you're seeing.

[Homestead31]

I suspect the real reason is that Boeing/Airbus/Their Key Suppliers and PCP/Alcoa have become much better at talking to each other so the entire supply chain needs less inventory (and in a sense, needs less distributor). I am not entirely sure what the answer is.

 

your suspicion is the reason that WAIR has gotten smashed... i'm sure it contributes to KLXI as well, although spin dynamics and energy exposure are involved as well.

 

in my opinion, correctly answering your question is the key determinant in whether or not WAIR will be a successful investment here, and it is a huge contributor to KLXI as well (scooping up energy assets here will help KLXI).  i spent time on this issue a few weeks back and then put it in the "too hard" file. 

 

i'd love to know what Tom Bancroft at Makaira thinks about Wesco and then apply it to KLXI.

[krazeenyc]

it is worth reading the WAIR thread if you're interested in KLXI.

 

ordinarily i actually love distribution businesses b/c they are low capex.  however, as was pointed out on the WAIR thread, aerospace distribution is tough to understand at the moment.  distributors are normally an important part of the supply chain for aerospace b/c the manufacturers don't want to tie up working capital in inventory due to the cyclical nature of the business.  however, given the current mega-cycle manufacturers are trying to cut the distributors out.  BA specifically is doing this by trying to amalgamate the parts needs of all of the component makers into one purchase order.  distribution also seems to be less valuable to the ecosystem when it is a "few to few" supply chain meaning there are a few people who make the parts (PCP and AA) and a few people who buy them (the plane manufacturers... you can argue it should really be the tier one guys, but again, see what BA is doing by trying to do the purchasing for the tier one suppliers).  contrast this to say food distribution where there are a bazillion suppliers and a bazillion buyers.  it makes sense to have a middle man under these circumstances.

 

all that being said, as i understand it, WAIR is very BA dependent, and KLXI is not.  it also may be worth noting that despite WAIR's recent problems, Makaira has just filed that they have added even more to their position.

 

Thx for pointing it out. I would add  that while KLXI emphasizes they are not tied to BA, it's a white lie in my opinion (they claim to be tied to parts manufacturers like HON). The big OEMs are partnering w/ the parts manufacturers to dis-intermediate distributors altogether. So if this becomes reality the OEM-parts business goes away as well.

 

KLXI's positioning is much stronger than some think. The short term slowing of growth is due to the large number of new planes that are still under warranty. This large influx of new planes will lead to a lot of growth in the coming years. Being able to be a 1 stop shop for parts and service is a huge competitive advantage for KLXI.

 

KLXI is the exclusive licensee for Honeywell parts (as they bought their distribution business a few years ago). They have a 30 year exclusive license for honeywell proprietary fasteners, seals, gaskets and electrical components tied to products including Honeywell's engines, auxiliary power units, cockpit electronics, wheels and brakes.

[gym97]

I don't disagree with you krazeenyc. Curious to know your thoughts on the below.

 

do you think KLX will lose significant share with Wesco presumably facing pressure from Boeing and wanting to do more MRO? there doesn't seem to be any barriers to wesco doing this.

 

How big a part of their business do you think the exclusive honeywell contract is? Would it be say more than 10% of their revenues? I would assume that it might even be less than that.

 

There is a large influx of new planes - don't new planes require less maintenance and in general use fewer fasteners? do you have any data on what to expect here?

 

[krazeenyc]

I don't disagree with you krazeenyc. Curious to know your thoughts on the below.

 

do you think KLX will lose significant share with Wesco presumably facing pressure from Boeing and wanting to do more MRO? there doesn't seem to be any barriers to wesco doing this.

 

How big a part of their business do you think the exclusive honeywell contract is? Would it be say more than 10% of their revenues? I would assume that it might even be less than that.

 

There is a large influx of new planes - don't new planes require less maintenance and in general use fewer fasteners? do you have any data on what to expect here?

 

I would assume that it's far greater than 10% of their revenues. I would look at it in terms of their Aerospace revenues (ignore O&G).  When BEAV acquired Honeywell consumables the Honeywell business did $535MM in revenues and $85MM in ebitda.

 

Yes so the new planes -- especially under warranty -- don't need KLXI. Eventually, however, they won't be new anymore. So it's basically a cycle -- the current new build cycle is great for BEAV -- in a few years that will translate into great growth for KLXI. 

[Ham Hockers]

Boom.

[Spekulatius]

Aircraft manufacturing has been a minefield recently, so I would be careful stepping in here. The goodwill write off does not really change the value of the business other than acknowledging that the energy distribution business is impaired, which is not exactly big new.

 

I do think the goodwill write off very likely sets the stage for a bad earnings report.

[farbelow]

KLXI has dropped significantly and I thought it merits to kick this thread awake.

The aerospace distribution business seems to be a horse race between KLXI and WAIR: who ever gets bigger wins. And it seems to me KLXI has the odds in their favor. I may be mistaken and am curious to hear opinions otherwise. The way I see it:

[*]KLXI has a head start, because it has more market share

[*]KLXI has more experienced management: Amin has been a director or CEO for the last 30 years in the aerospace business. He started as founder / director of BEAV in 1987. Amin's performance at BEAV has been impressive. WAIR's CEO and CFO are both new since 2015.

[*]KLXI has more dry powder for acquisitions: 1B vs WAIR's 350M.

[*]KLXI's business is more international: 40% of revenue vs 20% for WAIR

[*]KLXI has better operating margins: approx.14% for KLXI vs 7% for WAIR (WAIR has a higher roic though, because of less inventory)

[*]KLXI's catalog has more SKUs: 1M versus WAIR's 600,000

[*]Last but not least: the aerospace distribution market should be coming KLXI's way: the number of new aircraft delivered grew strongly from 2011 onwards. So, this was good for OE business which is WAIR's home turf. After 5 years airplanes are more likely to go to an aftermarket shop for refurbishment and this is KLXI's home turf. And 2011 + 5 = ... 2016 . So from this year onwards aftermarket should be growing, and hence KLXI's market.

[jay21]

I like KLXI here. They just said they will start repurchasing shares as well.

 

It seems like a perfect long short pair with WAIR and I dont even do those things.

[cpan]

 

I think this one is very much dependent on how good the ceo is.  Here is a write up in VIC:

 

http://www.valueinvestorsclub.com/idea/KLX_INC/136398

 

The discussion is very interesting.  Its unclear how good the ESG business is right now so you really have to trust that it is an opportunity of a life time as the ceo Amin K keep repeating.    Amin says all the right things but I wish I know more about his background.  The track record at B/E aerospace is pretty amazing though.

[jay21]

 

I think this one is very much dependent on how good the ceo is.  Here is a write up in VIC:

 

http://www.valueinvestorsclub.com/idea/KLX_INC/136398

 

The discussion is very interesting.  Its unclear how good the ESG business is right now so you really have to trust that it is an opportunity of a life time as the ceo Amin K keep repeating.    Amin says all the right things but I wish I know more about his background.  The track record at B/E aerospace is pretty amazing though.

 

ESG is given a negative value if you look at ASGs value relative to WAIRs. Tough to think those businesses are worth less than 0 (although its possible).

 

And hes not sinking a ton into ESG so far.

[cpan]

 

I agree that compared to WAIR, KLX is better.  However, maybe the market has both wrong.  Any thought on Fastnel moving into this space? 

[jay21]

 

I agree that compared to WAIR, KLX is better.  However, maybe the market has both wrong.  Any thought on Fastnel moving into this space?

 

1 - Thats why I said its the first time I ever thought to put on a pair trade. Seems natural. I do think ASG is a good business though and its pretty cheap here on an absolute basis.

 

2 - No. Other than the SKUs dont overlap I dont think so FAST would have to acquire most likely. Im not sure if this space would support 3 players either so FAST would have to out muscle one or the other. Seems too competitive for them.

[farbelow]

 

I think this one is very much dependent on how good the ceo is.  Here is a write up in VIC:

 

http://www.valueinvestorsclub.com/idea/KLX_INC/136398

 

The discussion is very interesting.  Its unclear how good the ESG business is right now so you really have to trust that it is an opportunity of a life time as the ceo Amin K keep repeating.    Amin says all the right things but I wish I know more about his background.  The track record at B/E aerospace is pretty amazing though.

 

ESG is given a negative value if you look at ASGs value relative to WAIRs. Tough to think those businesses are worth less than 0 (although its possible).

 

And hes not sinking a ton into ESG so far.

 

ESG seems to have gotten off on a false start and I currently ascribe no value to ESG and only see it as optionality.

I think Amin is strategically very strong. The share price of BEAV has grown 12% compounded between 1990 and 2014 under his leadership. At BEAV he found value in places you would not first think of, like ovens and first class seats. He seems to be repeating these not-so-obvious approaches at ESG. F.e. ESG provides specialized experts and equipment to locate and remove blockages or lost equipment from the reservoir that impede drilling or production operation. Not the first thing you would think of.

 

I checked Amin's outlooks in the BEAV quarterly conference calls of the last couple of years. He both overpromises and underpromises. I could not find a clear trend. And I agree with jay21 that Amin does not seem to be sinking cash into ESG too much.