Investment Thesis

Decent full-year earnings, relatively high profitability ratios, and decent free cash flow prompted me to check Global Industrial Company (NYSE:GIC). Considering the potential downturn of the economy in the next year or two, a strong balance sheet and free cash flow make this company a good long-term investment, however, I would wait for a further decrease in the stock price as the uncertainty in the economy still lingers with economists now predicting a hard landing.

Global Industrial Company is not a very popular or fun company. A lot of people may think it is downright boring, however, boring is good. Hidden gems like this company can provide some great returns to its shareholders in the long run. In this article I will be looking at how the company performed in the past and how it may continue to perform in the future future, considering the supposed recession looming over the economy in the next 12-24 months, any potential growth catalysts that the company might have in store and present a 10-year DCF analysis and a Dividend model seeing that the company has increased the dividend recently by 10% which gives a yield of 2.94% with a very low payout ratio, meaning there is plenty of room to reward its shareholders in the future.

Briefly on FY2022 Results

E-commerce has attributed to 57% of total orders, up only 1% yoy, however, the company is focusing on improving the online experience which would ultimately drive-up growth and improve profit margins. Sales increased by 9.7% yoy. Operating income increased by 19.5%, and net income by 10.9%. The company also managed to improve gross and operating margins as it became more efficient and streamlined. In the upcoming year or two, it would be great to see margins improve even further, which may translate into higher free cashflows. Overall, the results were decent and promising, but nothing too outstanding in my opinion. The management also mentioned that they are seeing some weakness continuing from Q4 2022, which will affect their sales numbers, but we don’t have any solid numbers. The potential of a recession has customers already curbing the demand for products, due to inflation still persistent.

Revenue Potential or Lack Thereof

Since around 2015, the company has steadily been increasing its revenue by focusing on its core customer base with higher retention and profitability and enhancing its e-commerce capabilities further, which is improving operational efficiency and optimizing its pricing strategy. The company is also focusing on increasing same-day shipping volume and more efficiency in the ocean and domestic freight to pass on more savings to customers. The company has been experiencing tremendous growth in Canada, which prompted them to open a new state-of-the-art distribution center in the Greater Toronto area. We will have to see in future earnings calls if they mention exceptional growth in Canada now that the distribution center is fully operational.

The only other major revenue catalyst that I found that could propel revenues further is the launch of market verticals in hospitality and healthcare. To put this into perspective, the global healthcare services market is expected to grow at an annual growth rate of 8.4% through 2026 which will bring the market size to over $10T. The management said they are very happy about the early results of the integration in this sector, however, since it is still in very early stages, we don’t have any solid numbers yet and will have to wait for the next year or so get a better look at how successful they were, but if they manage to penetrate the market in a significant way then there is a lot of revenue to be had.

The management is also not looking into any new potential M&As right now, but they said they are open to any potential acquisitions if it makes sense for them. The tone has not changed since Q1 when asked about M&As to the FY22 earnings call either. They are open but it does not seem to be the priority for them as they would like to focus more on their ability to grow organically, which is great, I appreciate that they are trying to squeeze as much as they can out of their initiatives before jumping into acquiring other companies to improve their revenue generation.

With the lack of any solid revenue catalysts except for the ones mentioned above, the company seems to be chugging along quite nicely, by growing organically, increasing the FCF quite substantially year-over-year, which can lead to a great investment in the long run if the company manages to continue to generate good cash flow in the future and find some potential acquisitions, but they are picky in that regard, which I find to be a good sign. They are looking for acquisitions that would synergize well with their current portfolio of products and not just add to the top line.

Financials

So far, the company may not seem like a very exciting opportunity, with the lack of growth, however, they want to grow organically and that is admirable and FCF generation has improved. These metrics warrant a further look into the company and how it is being managed, so let’s look at the books.

While we’re on the subject of cash, the company managed to increase its cash position by 85% from $15.4m to $28.5. If they can continue this for the next couple of years, they will have more than enough money to start acquiring any companies that they believe will synergize well and debt repayments will not be a problem. Currently, also the company has zero long-term debt and as of Dec 31^st2022, they had $600,000 of short-term debt which stood at $4.5m a year prior.

Looking further into the liquidity of the company, the current ratio has reached the minimum threshold that I like for companies to have, sitting at around 2 right now. If the company can keep this up, there will not be any red flags in terms of its liquidity.

As mentioned earlier, the company has been improving its gross, operating, and net margins over the last while, and if it can continue this through improving efficiencies, it can only become a much more attractive long-term investment. Although the improvements are quite tiny, I do expect them to improve further as the management is aiming to reduce the company’s inventory levels.

Return on invested capital is outstanding, however, from my calculations, it looks like it has dipped a little bit in the last 3 years. I hope it levels out in the future and even continues climbing up. Right now, I am not worried much about the downtrend at all.

I would say overall, the company’s balance sheet is in very good shape and could warrant a long-term investment just on that alone, however, it is still possible to overpay if entered an investment at the wrong time, for example, when everyone’s exuberant about the future and all companies are trading at a huge premium already.

The P/E Ratio of the company has been much higher in the past and it could be a decent time to start a small position, although, I wouldn’t base my investment decisions on this ratio alone. However, with the above financial metrics, this is looking promising. And if we compare P/E ratios over the last five years with similar market cap competitors, we find that GIC is the cheapest.

DCF Valuation

Because the management doesn’t provide guidance, it is quite difficult to speculate on the future growth of the company, however, with the above research done, I decided to take into account the looming recession fears in 2023 and 2024 and implement a decreased growth in revenues and a subsequent recovery to what I believe would be decent growth estimates.

I have modeled 3 scenarios, a conservative case, a base case, and an optimistic case. In all 3 scenarios I have argued that we will see a recession in 2023 and 2024 which will see a decline in revenues for the base and conservative case, but since the company is well diversified, I argue that the declines won’t be as bad . For the base case, my growth assumptions for ’23 and ’24 are -5% and -4% respectively, then I assumed a bounce back in revenue of +10% and then averages around 4% growth a year until 2032, giving me a total average growth of 2.9% a year for the next 10 years. You might think this is very conservative seeing that the company has grown much more before and you would be right, however, I like to approach valuations with a very conservative mind and if the company passes these low estimates and is undervalued or at fair value then I would be able to invest in a company with little worries.

For the actual conservative scenario, I assumed a more severe outlook in ’23 and ’24, where revenues go down 7% in both years and recover, which gives me around 1.6% growth over 10 years, and for the optimistic case the recession was not severe at all, but the revenue remained flat for the first 2 years, which gives us an average growth of 5.4% a year. Now on top of what I think was a beatdown on the stock, I also added a margin of safety of 25% on the final share price, which leaves me with $26.48 per share that the company is worth, meaning it is at fair value.

Dividend Discount Valuation for Further Analysis

The company has announced that they are increasing the quarterly dividend by 11.1%, bringing it to 20 cents per share. In the last 5 years, the company has been increasing the dividend quite consistently but decreasing the pace every year. For the multistage dividend model I assumed a 10% increase for the next 5 years and then 5% in perpetuity, and of course, I added a 25% margin of safety on the share price also to give me more certainty, the final price for the company is $23.35 which means the company is slightly overvalued.

Closing Remarks

The company might seem boring, but boring is good at making money in the past and has some promising potential to weather the storm in the upcoming 2 or 3 years. The main reason I applied such conservative assumptions to all of the valuations is because of the looming uncertainty in the economy, where prices are still elevated, and interest rates are still rising, albeit at a slower pace hopefully. I would recommend holding off on purchasing anything for the next couple of months or half a year at least until we see some more positive news around the globe. I could see stocks dropping more in this volatile time and if it does, I got my watchlist filled with price alerts I am waiting for the day when I can start adding to my portfolio once again, but for now, I’ll wait patiently, and keep searching for more boring, hidden gems in the meantime.