DSGR: Transformed, Growing, Owner-Operated Specialty Distributor

Brad Hathaway of Far View Capital Management presented his investment thesis on Distribution Solutions Group (US: DSGR) at Best Ideas 2024.

Thesis summary:

In April 2022, Distribution Solutions Group (DSGR) undertook a significant transformation from a sleepy, illiquid sub-$500 million market cap company with limited avenues for capital redeployment to a $1.2+ billion diversified specialty distributor.

As a result of this transformation, DSGR has become a critical investment for its majority shareholder who intends to create a high-quality, buy-and-build compounder in the specialty distribution space. This plan involves more than tripling FCF over the next few years between organic growth and accretive M&A.

Because of the company’s limited trading volume ($1.5 million per day) and poor sell-side coverage (three small analysts who barely cover it), DSGR’s transformation remains misunderstood by the investor community. However, on September 28, 2023, DSGR held its first investor day, providing a roadmap for cash flow growth and which should be a catalyst to help investors better understand the business. The key takeaway was DGSR providing guidance for a >20% EBITDA CAGR over the next five years, taking EBITDA up to $450 million and >$5 of EPS. FCF should be higher than net income as D&A is greater than capex, so the company should generate ~$5 of FCF per share, suggesting an over $100 share price.

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About the instructor:

Brad Hathaway is the Managing Partner of Far View Capital Management, an investment firm based in Aspen, Colorado. Before founding Far View Capital Management in 2011, Mr. Hathaway worked for four years at J. Goldman & Company, a New York City-based hedge fund. At J. Goldman, Mr. Hathaway worked as an analyst and a portfolio manager on the firm’s value team. His role there included sourcing and analyzing investment opportunities and managing a portfolio of global securities from multiple asset classes with a focus on US publicly-traded equities. Prior to J. Goldman, Mr. Hathaway worked for three years as an analyst at Tocqueville Asset Management where he discovered and researched global long and short equity investments for the International Value mutual fund and the Global Partners hedge fund. Mr. Hathaway graduated with a B.A. in Political Science from Yale University. He is a board member of CDON AB, a Nordic 3P e-commerce marketplace listed on the Swedish stock exchange.