Undervalued Wholesale Distributor: Essendant

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Looking forward to a further price drop

Essendant, which is four more years turning to a centennial-old company, has suffered quite a wreck in its share price in recent years. From a high of $45.88/share back in January 2014, and now down to $9.66/share (1/28/2018).

So far this year, however, the Illinois-based company seem to have turned the strong tide and was up ~4%.

The leading national wholesale distributor of workplace items also had an attractive 5.8% dividend yield, along with a nearly 30% discount to its book value of $510 million.

The company is scheduled to report its year-end 2017 figures on Wednesday, February 22, 2018.

Meanwhile, the company’s third-quarter performance that ended in September 2017 reported a 6.7% decline in overall revenue and a disappointing $265.4 million in losses compared to $66.2 million in profits the year earlier.

What brought down Essendant to losses was its two goodwill impairment charges that summed to $285.2 million in relation to its office and facilities.

“Challenging industry dynamics and sales declines persisted, particularly in our national accounts channel.”

“This year’s sales declines were largely unanticipated and outpaced our ability to reduce costs. Accordingly, I have worked with our leadership team and our Board to identify and launch the key strategic drivers that will improve our performance: improving efficiency across our distribution network and aligning our cost base, driving sales performance in key growth channels, and developing supplier partnerships that leverage our network and capabilities. We will act with urgency to execute against these priorities and reset our cost structure. We are targeting annualized cost savings in excess of $50 million by 2020. We have launched efforts to achieve these savings and will continue to refine this savings target and provide updates as we develop our detailed plans.”

Ric Phillips, President and Chief Executive Officer of Essendant.

Ric Phillips, meanwhile, is Essendant’s newly installed CEO and had taken the role just last June 2017. Robert B. Aiken, Jr., former CEO, resigned after less than two years in the jobjob, and left for TreeHouse, a packaged foods/beverages manufacturer.

Interestingly, Aiken also just had resigned from TreeHouse after less than a few months on the job as TreeHouse’s President.

According to filings, Essendant’s product offerings may be divided into the following primary categories: (1) janitorial, foodservice and breakroom supplies, including foodservice consumables, safety and security items; (2) technology products such as computer supplies and peripherals; (3) traditional office products, including writing instruments, organizers and calendars and various office accessories; (4) industrial supplies, including hand and power tools, safety and security supplies, janitorial equipment and supplies, welding products; (5) cut sheet paper products; (6) automotive products, such as aftermarket tools and equipment; and (7) office furniture, including desks, filing and storage solutions, seating and systems furniture.

Essendant also has one customer, W.B. Mason Co., Inc., which constituted approximately 11% of its 2016 revenue (~$600 million).

In the past three years, Essendant’s revenue has grown 1.83% on average, but margins have eroded.

Meanwhile, the company’s overall debt outstanding was at $509.9 million as of September (0.9x debt-equity; -$271 million lower since December 2016).

Looking back in three years that ended in 2016, Essendant was able to reduce its financing activities by $115 million and was able to generate $279 million in free cash flow. Accumulative dividend payouts were a healthy 23% of its free cash flow in the period.

Unappealingly, Essendant’s book value has declined (as a matter of write-downs) in the recent quarters. My rough estimations suggested a value per share of $11.23 (~13% higher than today’s share price of $9.66.

If Essendant should again fall in the upcoming earnings release, then it may be a good sign to pick up some of its shares.

Disclosure: no shares in any of the companies mentioned.

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