Filed Under:
Tickers in this Article: USTR, MCD, MO, PG, WAG
I've always been a fan of companies that do simple things well, and do those simple things repeatedly. For that reason alone, I've been a long-time fan of Walgreen (NYSE: WAG), Altria (NYSE: MO), McDonald's (NYSE: MCD) and Proctor & Gamble (NYSE: PG).

Now, I think another company can be added to this short list of admirable firms: United Stationers (Nasdaq: USTR), the largest North American wholesale distributor of business products.

And talk about simple: United wholesales nearly 50,000 items to 20,000 resellers, who, in turn, sell directly to end-users. Products are classified into four principal categories: technology (42% of sales), traditional office (29%), janitorial/sanitation (16%), and office furniture (12%).

Simple and Efficient
More importantly, United distributes what it distributes well, and it distributes repeatedly well. The company's vast array of inventory is distributed through a cutting-edge computer-linked network.

United maintains an electronic data interchange and interactive order system that link it to selected resellers who are able to forward customer orders directly to United. Ninety percent of the company's orders received are filed electronically. The middleman is eliminating the middleman.

To improve efficiency and further its competitive advantage, United recently launched Project Vision - a major IT initiative. Project Vision's goals include enhancing the company's competitive advantages, improving systems capabilities, increasing flexibility and reducing operational costs.

Management believes Project Vision will help United reach its goal of removing $100 million in annual costs over the next five years. In turn, this will help United reach management's long-term financial objective of growing earnings per share at an annual clip of 12% to 15%.

Persistence Pays
What I like most about United, though, is the steady northeasterly trajectory of important metrics. Over the past 10 years, revenue has grown at a steady 6.0% average annual rate, earnings have grown at a spectacular (though volatile) 34.6% average annual rate, and operating cash flow has grown at a 17.4% average annual rate. Meanwhile, long-term debt to capital has fallen from 66% to 12.5%.

Near-term performance has been equally impressive. 2006 revenue rose 6% to $4.5 billion, from $4.3 billion in 2005, while net income increased 33% to $135.3 million, or $4.31 per share, from $101.5 million, or $2.90 per share. Nearer-term performance is even more impressive. For the first quarter of 2007, United's reported quarterly earnings rose a whopping 51%, as cost-containment initiatives continue to improve margins.


So What's it Worth?

Management's goal to grow EPS 12% to 15% annually is admirable, to be sure. But I'm more conservative; I'll settle for 10% over the next three years and 5% into perpetuity. Discounting my more conservative estimates and the 2006 EPS of $4.31 by 11%, I arrive at a net present value of $86 per share. And if EPS actually grow by 10% in 2007, United will end the year with EPS of $4.74. At today's price of around $64 per share, that gives the stock a forward P/E ratio of a mere 13.5.

And though United doesn't pay a dividend, it still returns money to shareholders. In fact, management recently approved an additional $100 million in stock repurchases after repurchasing $125 million, or 2.6 million shares, in 2006. When it's all said and done, United will have repurchased almost 20% of shares outstanding.

Finally, there's the takeover card, which I don't like to play too often. However, with a market cap of a mere $2 billion, United is readily digestible by most private-equity firms. What's more, it has all the ingredients private equity desires - low debt, strong cash flow, a simple business model and sound management.

Come to think of it, they're the same ingredients public equity desires as well.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus

Trading Center