Anixter (NYSE:AXE) is a value-added distributor of data cables, security products, as well as low-voltage and high voltage electrical wires. It sells some 500,000 different SKUs sourced from thousands of manufacturers. Manufacturers rely on Anixter to reach target customers and the customers depend on Anixter to evaluate and test appropriate products for their particular needs. In a very general sense, Anixter’s business model is similar to that of a broker, earning a relatively stable gross margin, without assuming inventory or obsolescence risks. Since most product costs are passed through, gross profit serves as a revenue base to cover the operational expenses such as the company’s 230 warehouses and some 3,000 person salesforce.
Over the last few months, investors sold off AXE shares due to weaker economic conditions. Spending on nonresidential construction, oil and gas, and general capital expenditures all have slowed down. The stronger US dollar also weakens foreign sales as well as causing negative financial translation. We see these pressures as transitory and likely abating over 2016. Moreover, we see a long-term visible path to cost reduction and deleveraging spurred by acquisition integration and internal cost controls, which should leverage the benefit of recovering revenue growth.
From the Third Avenue Value Fund 1st quarter 2016 letter.
