Yet Another Value Podcast 对 $DNOW 的判断变化

we're talking about DNOW. DNOW is a distributor mainly focused on oil and gas. And now they're upstream, they're mid-stream, they're downstream, they're all over the oil and gas.

Steve's got a really interesting view on Dow this was a spin-off 10 years ago and why you know the spin-off hasn't gone I don't want to say poorly but it hasn't gone great and he thinks the environment is setting up like trial multiples trial eval trial everything and they point this out in their proxy trout and they just did a merger the integration's behind them and the free cash flow was set to explode and I think he lays it out and he lays it out why he thinks over the next few years the stock could really really work from here.

it's still a very interesting name that I've got a lot of notes on over the years. the company we want to talk about today was DNOW. The ticker is Dow. DN O W.

And then they spun spun off this company which is quite a different business. It's an oil and gas distribution business and historically they have been primarily in uh what's called upstream and midstream. So you're thinking about like extracting oil and then pipelines and uh things like that.

Um after the company was uh spun out uh and became a separate public company they have uh they have been growing uh primarily through acquisitions. So the way like as a typical in distribution business quite often you see very a lot of fragmentation in the industry a lot of mom and pop shops with a particular relationships with a particular clients and then it makes sense to take those uh smaller companies in for larger player with the cheaper cost of funding. It makes sense to take that company in, consolidate maybe all of the orders into a few a few fewer number of centers which makes them more efficient and as a result of that you get a fairly good efficient growth and and returns on capital and this is a playbook that we've seen happening in for high quality distributors being done in many different industries and I think oil and gas is no different.

so the leverage point is quite interesting because up until recently and we're going to get to that transaction I'm sure the company actually did not have a lot of leverage so they were financing the transactions that they were doing were being done at a relatively low multiple especially once you take into account the synergies that they have produced from uh from the combined companies and uh the company actually did not have a lot of leverage up until so recently and it's still doesn't but now they do have some debt that they have acquired in this latest acquisition which is kind of a big part of what the what's going on right now and what makes the company attractive and uh the potential here

I remember this company, you know, this was spun off in like late 2014 and that's kind of when I was like starting as a public markets focused professional investor, let's say. I remember this company getting pitched back then, right? Because what does every what does everyone like? Spin-offs. A spin-off that was like captive to one customer distribution, big role, like everybody loved this. And if I just go, you know, there's been ups and down, but the stock spins off at 35. Within a year, it's trading at 13. And as you and I are talking today, it's trading at 16, 15 to 70, right? So the stock is down from the spin and flat over like a 10-year base. So I just want to ask like what happened with it hasn't again I know people who this spun off and they're like 10% position love this this is going to the moon. Why hasn't this worked over the past 10 years?

So let's step back for a second. What do they do? They uh for for upstream and midstream they sell essential parts a lot of these are consumables for companies that trying to get oil out of the ground. essentially this company has been operating and we didn't own it in 2014 and arguably it was a good company and we can discuss what happened after that and how much they have done essentially how hard what did they have to work to stay in place from a point of view of their earnings but uh kind of the earnings that they have generated in in an environment in which the addressable market has shrunk dramatically.

And this is not the type of company. If I would believe that this is the market that will continue to shrink from here, this would not be interesting to me. But I think there is something that's happening here.

which is actually helping companies like Dino. So they just reported Q2 which they already showed like a 10% growth in quarter over quarter in years for various reasons but I think it's just the beginning of what we could be seeing from this company.

they reported earnings last week and the stock is up like 10 to 15% and we'll talk price targets everything. So there is a jump and but I I don't think you know I've had people come on and bit the stocks up 20% and they want to take a victory lap. I don't think you're taking a victory lap. I think as you said you think this is just getting started.

but the reason I mentioned last week's earning is I I read it to prep for this and you could hear the CEO comes on and he's like business is firing on all cylinders. There's all this interest all this sort of stuff.

So D now historically has been actually so it's it was in upstream and midstream. So it is the getting the oil out of the ground and the pipes and the down and then MRC was mostly in downstream and utilities.

I think uh uh think D now had let me just pull up my numbers uh D now had u about 150 million of ibida dinina and MRC had 175 million of ibida and then they said that between the two they would have about 75 million ibida of synergy so actually meaningful number it's about increasing the combined company Ibida by about 20%.

But what happened in between is that while while they were buying uh while Dena was after Dena has agreed to buy MRC, they also inherited not just this relatively synergistic business, they also inherited a uh ERP ERP system implementation which is to put it wasn't going too well.

what the company said when they were reporting 2025 which was a kind of and they all these problems that related to MRC was appearing they said if we was Dina was saying if we were standalone company we would make 200 million in 2025.

So, and I think what's happening is that they are still so what they uh at first they had to throw quite they I think they were saying that they were throwing about 8 to9 million per quarter into what seems like to literally manually fill orders while they were figuring out the MRC ERP systems.

I do think that this is they're being very conservative about their projection projections for next year because they're still in the middle of trying to figure out what the what the combined company is going to look like and they do not want to be in a situation where they overpromise in order to deliver

and I think as far as then to your question between if you would look at where we were in the middle of 2020 uh 25 and where we are from a point of view of the demand at the end of 2026 and maybe halfway through to 2027 if you would ask just a question of should these companies be making more money or less money I think the answer should be more right so I think part of it is that they're being conservative and they're still trying to figure out and they do not want to be in a situation where they disappoint the market again which is what they did at uh when they reported 2025 and the stock when they reported all these problems with FRC and the stock market was down something like 40% if it was the same day or within a couple of days, but it was a pretty massive drop.

historically this number was quite volatile but it averages out that on average uh for D now the market was willing to pay about 5 to 6% free cash flow. you also call it I don't know 17 times free cash flow 20 times free cash flow that was the kind of multiple that the market historically said we're comfortable paying for this business yes it's volatile but as you said it's capital light um it's quite quite a bit of it's very sticky business even like if you go back to what happened with MRC they barely lost any customers right so in in the environment where they're not your customer is not delivering your distributor is not delivering to you the parts that they're supposed to if you're not leaving you're sticking and they barely lost any customers.

So they uh this is a sticky business. It's a it's arguably high quality business and the market historically has paid about a 6% free cash flow yield. So if we're looking out to even if we go with the 350 million number and as you mentioned there's very very little capex uh the company with MRC they inherited some debt before that there was no debt. Uh right now they're paying I think about $30 million a year in interest on that debt on MRC. Uh they said that they will