DNOW (DNOW)

Energy and industrial distributor DistributionNOW (NYSE:DNOW) met Wall Streets revenue expectations in Q3 CY2025, with sales up 4.6% year on year to $634 million. Its non-GAAP profit of $0.26 per share was 11.4% above analysts’ consensus estimates.

Company Overview

Spun off from National Oilwell Varco, DistributionNOW (NYSE:DNOW) provides distribution and supply chain solutions for the energy and industrial end markets.

Focusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.

Competitors in the industrial distribution industry include MRC Global (NYSE:MRC), Wesco International (NYSE:WCC), and Ferguson (NYSE:FERG).

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, DistributionNOW grew its sales at a tepid 4.6% compounded annual growth rate. This was below our standard for the industrials sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. DistributionNOW’s recent performance shows its demand has slowed as its annualized revenue growth of 2.5% over the last two years was below its five-year trend.

This quarter, DistributionNOW grew its revenue by 4.6% year on year, and its $634 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.6% over the next 12 months, similar to its two-year rate. Although this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.

DistributionNOW has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 22.7% gross margin over the last five years. That means DistributionNOW paid its suppliers a lot of money ($77.34 for every $100 in revenue) to run its business.

In Q3, DistributionNOW produced a 22.9% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

DistributionNOW was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.2% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, DistributionNOW’s operating margin rose by 7.4 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, DistributionNOW generated an operating margin profit margin of 5.2%, up 1.4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

DistributionNOW’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

DistributionNOW’s flat EPS over the last two years was worse than its 2.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of DistributionNOW’s earnings can give us a better understanding of its performance. While we mentioned earlier that DistributionNOW’s operating margin expanded this quarter, a two-year view shows its margin has declined. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, DistributionNOW reported adjusted EPS of $0.26, up from $0.21 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

DistributionNOW has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.5%, subpar for an industrials business.

Taking a step back, an encouraging sign is that DistributionNOW’s margin expanded by 2.1 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

DistributionNOW’s free cash flow clocked in at $39 million in Q3, equivalent to a 6.2% margin. The company’s cash profitability regressed as it was 5.7 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

DistributionNOW historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.9%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. DistributionNOW’s ROIC has increased over the last few years. This is a good sign, and we hope the company can continue improving.

Companies with more cash than debt have lower bankruptcy risk.

DistributionNOW is a profitable, well-capitalized company with $266 million of cash and $25 million of debt on its balance sheet. This $241 million net cash position is 15.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see DistributionNOW beat analysts’ EPS expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 4.9% to $13.90 immediately after reporting.

Updated: December 3, 2025 at 10:18 PM EST

Before deciding whether to buy DNOW or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

DNOW isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last five years. And while its expanding operating margin shows the business has become more efficient, the downside is its low gross margins indicate some combination of competitive pressures and high production costs. On top of that, its operating margins are low compared to other industrials companies.

DNOW’s EV-to-EBITDA ratio based on the next 12 months is 21.6x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $17 on the company (compared to the current share price of $14.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.