DistributionNOW (DNOW)

Energy and industrial distributor DistributionNOW (NYSE:DNOW) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 6.4% year on year to $599 million. Its non-GAAP profit of $0.22 per share was 26.9% 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).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. DistributionNOW’s demand was weak over the last five years as its sales fell at a 2.8% annual rate. This was below our standards and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. DistributionNOW’s annualized revenue growth of 3.5% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, DistributionNOW reported year-on-year revenue growth of 6.4%, and its $599 million of revenue exceeded Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and indicates its newer products and services will not lead to better top-line performance yet.

DistributionNOW has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 22.3% gross margin over the last five years. That means DistributionNOW paid its suppliers a lot of money ($77.70 for every $100 in revenue) to run its business.

In Q1, DistributionNOW produced a 23.2% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

DistributionNOW was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.3% 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 11.7 percentage points over the last five years.

This quarter, DistributionNOW generated an operating profit margin of 5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 EPS grew at an astounding 82.8% compounded annual growth rate over the last five years, higher than its 2.8% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

We can take a deeper look into DistributionNOW’s earnings to better understand the drivers of its performance. As we mentioned earlier, DistributionNOW’s operating margin was flat this quarter but expanded by 11.7 percentage points over the last five years. On top of that, its share count shrank by 2.1%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For DistributionNOW, its two-year annual EPS declines of 6.9% mark a reversal from its (seemingly) healthy five-year trend. We hope DistributionNOW can return to earnings growth in the future.

In Q1, DistributionNOW reported EPS at $0.22, in line with 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 decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.2% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that DistributionNOW’s margin dropped by 4.8 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

DistributionNOW burned through $22 million of cash in Q1, equivalent to a negative 3.7% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative 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 5.4%, 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. Over the last few years, DistributionNOW’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

DistributionNOW is a profitable, well-capitalized company with $219 million of cash and $28 million of debt on its balance sheet. This $191 million net cash position is 10.9% 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.

We were impressed by how significantly DistributionNOW blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this quarter featured some important positives, but shares traded down 5% to $15.21 immediately after reporting.

Updated: May 22, 2025 at 10:59 PM EDT

Before investing in or passing on DistributionNOW, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We see the value of companies helping their customers, but in the case of DistributionNOW, we’re out. To kick things off, its revenue has declined over the last five years. And while its expanding operating margin shows the business has become more efficient, the downside is its cash profitability fell over the last five years. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

DistributionNOW’s EV-to-EBITDA ratio based on the next 12 months is 10.1x. 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 $16.50 on the company (compared to the current share price of $14.59).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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