Does Distribution Solutions Group (DSGR) Have Significant Upside Potential?

Distribution Solutions Group (DSGR) has been making waves in the specialty distribution market, with a strong performance in the third quarter of 2024. The company reported record quarterly sales, up 6.6% compared to last year's third quarter, and an adjusted EBITDA improvement of 12.4% over the prior year. DSGR's adjusted diluted EPS was 37¢, up from 27¢ in the previous year. The company's acquisition strategy has been instrumental in driving long-term growth by expanding its geographic footprint, enhancing service offerings, increasing its customer base, improving operating leverage, and achieving synergies. DSGR's acquisition of Source Atlantic, for example, brought in $39.1 million in revenue for the Canada Branch Division in the third quarter of 2024, contributing to the company's overall revenue growth and diversification.

DSGR's acquisition strategy has also allowed the company to enter new markets and tap into new revenue streams. The acquisition of HISCO, Inc., for instance, has enabled DSGR to expand its product portfolio and enter the aerospace and defense sectors. This diversification has helped DSGR mitigate risks associated with relying on a single market or product line. Additionally, DSGR's acquisition of Source Atlantic brought in $24.7 million in revenue from this customer base alone, further increasing the company's customer base and revenue streams.

DSGR's acquisition strategy has not only expanded the company's reach and offerings but has also improved its operating leverage. The company has successfully integrated its acquisitions, capturing more cost savings than anticipated. This has led to improved operating leverage, as evidenced by the 12.4% year-over-year increase in adjusted EBITDA to $49.1 million, with a margin of 10.5%. DSGR aims to double EBITDA from acquisitions over time, which will drive improvements in return on invested capital (ROIC) and ensure the sustainability of growth.

Despite challenges in organic sales, DSGR reports a 6.6% revenue increase and outlines plans for expansion and improved operating leverage. The company is expanding its sales force, with plans to increase the number of sales reps to 1,000 by mid-next year. This expansion is expected to drive organic sales growth and further enhance DSGR's revenue streams. Additionally, DSGR is focusing on improving its operational efficiency and cost management to achieve sustained profitability and outperform market expectations.



In conclusion, Distribution Solutions Group (DSGR) has significant upside potential due to its successful acquisition strategy, which has expanded the company's geographic footprint, service offerings, and customer base. The company's focus on improving operating leverage, expanding its sales force, and enhancing operational efficiency positions it for continued growth in the specialty distribution market. While DSGR faces challenges in organic sales and the broader economic climate, its strategic approach and strong performance indicate a promising outlook for investors. As the company continues to execute its growth strategy, it is well-positioned to capitalize on opportunities in the market and deliver value to shareholders.