Capitalizing on DXP's Temporary Pullback

In Q3 2025, DXP Enterprises delivered robust revenue growth, reporting $513.7 million in sales, up 8.6% year-over-year. The Innovative Pumping Solutions segment led the charge, with revenue rising 11.9% YoY, supported by strong demand for water infrastructure projects. Service Centers also expanded significantly, growing 10.5% YoY.

However, the Supply Chain Services segment declined 5.0% YoY, with management citing pricing lag effects and seasonal inventory drawdowns as key factors. This weakness tempers overall enthusiasm, though the company highlighted a record-high backlog in water infrastructure, providing visibility for future growth.

Recent acquisitions-including three completed in Q3 and two post-quarter-bolster strategic diversification efforts. While the SCS decline remains a near-term headwind, management expects a rebound in 2026, though operational leverage and integration risks could influence margins in the coming quarters.

Profitability & Liquidity: Margin Expansion Amidst Execution Challenges

Adjusted EBITDA rose solidly to $56.5 million during Q3 2025, reflecting the company's underlying operational strength despite segment challenges. This growth supported a healthy 11.0% margin, demonstrating tangible progress in controlling costs relative to revenue expansion. Free cash flow also improved significantly, climbing 15.4% to $28.1 million, underscoring the firm's ability to convert profitable operations into tangible cash reserves. These metrics highlight continued leverage from recent acquisitions and core business momentum.

Segment performance showed clear divergence: the Innovative Pumping Solutions (IPS) business grew 11.9% YoY, while Supply Chain Services (SCS) declined 5.0% YoY. Management attributed the SCS dip to pricing lag effects and seasonal customer inventory drawdowns, though they expressed confidence in a 2026 rebound.

The record-high water infrastructure backlog further bolsters growth visibility, suggesting future margin stability barring unforeseen disruptions.

EPS fell short of expectations primarily due to higher SG&A expenses and one-off costs. Management clarified these were temporary pressures rather than indicators of structural weakness, with the core operational metrics remaining robust. The combination of margin expansion, strong FCF generation, and a clear path to normalized earnings signals resilience, though the EPS miss serves as a reminder that cost discipline remains critical amid acquisition-driven growth. The company's liquidity position appears sound, providing a buffer to navigate near-term execution hurdles.

Valuation Gap: Significant Upside from Fundamentals

The market is clearly pricing DXP Enterprises (DXPE) below its intrinsic worth. Current shares trade at $96.71, representing a 41.8% discount to our calculated fair value estimate of $166.05. This substantial gap highlights what appears to be a significant undervaluation on the surface. Analysts, however, see more modest potential, projecting a 12-month price target of $136.50, which implies a 41% upside from the current level. While this projected gain is meaningful, it remains constrained by the paucity of analyst attention; only two analysts cover the stock, limiting market discovery and potentially obscuring its true fundamentals to a broader investor base, a notable risk factor. Despite the low coverage, the stock's valuation metrics remain relatively compelling. Its PEG ratio sits at a precise 1x, suggesting the market is pricing growth expectations in line with earnings projections, providing a measure of reasonableness to the valuation. This combination of a wide fundamental gap and modest analyst upside, tempered by coverage limitations, creates a complex but intriguing opportunity.

Supply Chain Services: Navigating Temporary Headwinds

The company's Supply Chain Services segment faced pressure in the recent period, falling 5% year-over-year. Management attributed this decline specifically to "pricing lag effects and seasonal inventory drawdowns". While these challenges impacted near-term results, leadership expressed confidence in a recovery path, projecting a rebound for 2026 as these temporary factors normalize.

A current analyst landscape dominated by only two coverage analysts introduces a notable risk factor, potentially limiting market scrutiny and reducing investor confidence in the near term. This lack of broad analyst attention warrants caution when assessing the reliability of forward-looking statements.

Despite the SCS challenges, underlying operational strength exists. The company is leveraging significant operational leverage gained from recent acquisitions, which should improve margins as volumes recover. Furthermore, an exceptionally high backlog in water infrastructure projects provides concrete visibility into future revenue streams and growth potential. These factors represent key catalysts for the broader business.

Therefore, while optimism is justified by the robust water infrastructure backlog and acquisition synergies, the path to recovery for the Supply Chain Services segment remains contingent on successfully executing its plan and overcoming the specific operational frictions currently impacting that division. The 2026 rebound expectation is plausible but not assured.