Yet Another Value Podcast - $DNOW: the boring distributor that could double on 2029 numbers | Firebird Management

Episode Date: August 14, 2026

DNOW spun out of National Oilwell Varco at $35 in late 2014. A year later it was $13. Today it is around $16. Steve Gorelik's argument is that ten years of that chart is one long headwind rather than a broken business: 1,800 US rigs at the spin, under 600 now, global oil and gas investment 40% below 2014 in real dollars, and DNOW still grew margins and bought companies at 4 to 5x EBITDA the whole way through. Rigs have started ticking back up. The MRC Global merger brings $75m of synergies to two businesses that earned $325m of EBITDA apart in 2024. Management has soft-targeted $350m of EBITDA for 2027 against roughly a $3.5B enterprise value, which Steve gets to about $300m of free cash flow on a $3B market cap.My pushback is that 10x is not deep value, and the double comes almost entirely from multiple expansion back to the 5 to 6% free cash flow yield the market used to pay. Why is 10x the wrong number and not 12 or 14? We also get into the acquisitive compounder paradox, whether the incremental drilling actually shows up in US shale or somewhere else, the Oracle implementation they inherited from MRC and why they are now running it alongside SAP on purpose, the $50m of stock they bought back in the middle of that mess, and whether a business private equity would happily lever to four or six turns belongs in the public market at all. Steve's 2029 case is $30 to $32 per share.This episode is sponsored by Fiscal.ai: https://fiscal.ai/yav. I am a customer and I pay for their API with my own money. Two things I use it for constantly. First, they have a huge database of fund letters wired into the API, so when I am prepping a podcast or looking at an event my agent pulls every recent letter on the name and tells me what the bull and bear cases actually are. Second, financials with sourcing attached: I ask for a model and every line links back to the company specific KPI, segment, or ratio it came from, so I can click through and see exactly where the number is from. Use my link, fiscal.ai/yav, for 15% off their AI connector.Chapters:(00:00) Nobody gets excited about a distributor(03:48) What DNOW actually sells(05:29) The roll-up playbook, without the leverage(07:13) Why the 2014 spin never worked(12:47) My pushback: does the drilling come back in the US?(14:23) Shale payback periods and rigs getting less efficient(16:50) The MRC Global deal(18:04) Upstream plus downstream: what the combination buys you(21:24) The ERP implementation they inherited(24:39) Why 2027 guidance sits below what the two did apart(28:16) Free cash flow yield as the North Star(32:40) Buying growth at 4 to 5x while trading at 8 or 9(34:42) Paying down debt and buying back stock at the same time(35:38) $50m of buybacks in the middle of the mess(37:15) Running SAP and Oracle side by side on purpose(39:49) 1,907 rigs at the spin, 571 today(40:40) The 2029 case: $30 to $32 per share(41:01) Should this company even be public?(42:56) Would private equity lever it up?(43:31) Water, utilities and data centers(45:21) Why boring distributors compoundSteve Gorelik / Firebird Management: https://fbird.comLinks:Yet Another Value Blog - https://www.yetanothervalueblog.comSee our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimerProduction and editing by The Podcast Consultant - https://thepodcastconsultant.com/

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You're about to listen to yet another value podcast with your host, me, Andrew Walker. Today I've got Steve Gorlick on from Firebird. This is his third time on the podcast. And we're talking about, you know, it's funny. When he told me, we're talking about D now. D now is a distributor mainly focused on oil and gas. And now they're upstream, they're downstream, they're downstream. They're all over the oil and gas.

And when he was about to come on, I was telling, you know, it's funny distributors. They are, I don't know how long this podcast is going to be because distributors are such a boring business. You know, you say you've got a distributor. and there's not a ton to talk about, but while they're boring, you know, talk to a private equity firm about a distribution group and there are anything but boring to the private equity firm because these businesses are low-cap-ex, very sticky, very difficult to replicate, and they've got huge roll-up opportunities. So, you know, you think about a fast now or you think about a Wesco, like these are businesses that both in private and public markets have returned fortunes because

if you can just buy them and hold them, like they tend to do really well. And Steve's got a really interesting view on D. Now, this was a spinoff 10 years ago and why, you know, the spinoff hasn't hasn't gone, I don't want to say poorly, but it hasn't gone great. And he thinks the environment is setting up like trial, trial multiple's trial value, trial everything. And they point to sell in their proxy, trial, and they just did a merger, the integrations behind them and the free cash was set to explode. And I think he lays out well and he lays out why he thinks over the next few years, the stock could really, really work from here. So we're going to get to Steve in one second. And I will include a link, I believe, to both his substack and a present.

his denom presentation in the show notes. So you can go look at those in the show notes, but we'll get there in one second. First, word from our sponsors. Today's podcast is sponsored by Fiscal.A.I. Fiscal.A.I is the modern financial data provider for global equities. Look, that's what they have me tell you, but let me tell you how I've been using Fiscal.

Dot AI. And I'll remind you, I'm a customer. I paid with my own money to connect to the Fiscal.A.A. API API. There's two things that I've really found it useful for. Number one, this is something super unique. They've got a huge database of fund letters. and the fun letters are connected by the API. So whenever I'm researching a company,

whether it's researching the company because I'm interested in them or looking up an event or prepping for a podcast, the first thing I have my AI do is I say, hey, I'm prepping for a podcast on, I'm prepping for a podcast on HIMS. And the first thing he does is it says, hey, here's all the recent letters on Fiscal.A.I

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is I use it for edited financials, right? I've got my model and I say, hey, I'm looking at Hymns. Go build me model. And it says, sure, I'll build you a model. And every line in that model has a link. So I can see, oh, they're pulling this EBITA number. They're pulling this segment number. They're pulling this number from three years ago.

I click on it takes me right to Fiscal. And it says, hey, here's these company-specific KPIs. Here's these ratios. And I can see exactly where they're getting in, and exactly where they're kind of here. So it is a super reliable data provider that can connect to your AI. I found it super helpful. I'm a big fan of the,

the podcast. If you want to try it out, you can use my link at fiscal.a.i slash yavis to get 15% off their AI connector. That's fiscal.a.i slash yavie, and there'll be a link in the show notes. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have one for the third time. Steve Gorlick from Fire Road Management. How's it going, Steve? It's going for a new old. Thanks for having you back. I'm super excited for this. I think, uh, well, I was going to say maybe not. I really like the last one we did on Molina. This might not be quite as, Juicy, but it's still a very interesting name that I've got a lot of notes on over the years.

We'll get there one second, but first, disclaimer, remind everyone, nothing on this podcast, investing advice. Always true. Please check out the disclaimer in the show notes are at the end of the show. Steve, the company we want to talk about today was D-N-Now. The ticker is D-N-O-W, and I'll just tell us it over to you. What is D-N-O-N-W and why are they so interesting? So D-N-N-O-N-O-N-E is an oil and gas distributor. It was spun off a few years ago from this company, National Oil Well Barko, NLV. So it used to be kind of their in-house distributor, but then because NLV was a producer of certain equipment for the oil and gas industry. And then they spun of this company, which is quite a different business. It's an oil and gas distribution business. And historically,

they have been primarily in what's called upstream and midstream. So you're thinking about extracting oil and then pipelines and things like that. After the company, was spun out and became a separate public company. They have been growing primarily through acquisitions. So the way, like, as it typical in distribution business, quite often, you see a lot of fragmentation in the industry, a lot of mom and pop shops with a particular relationships with a particular clients. And then it makes sense to take those smaller companies in for a larger player with the cheaper

cost of funding. it makes sense to take that company in, consolidate maybe all of the orders into a few number of centers, which makes them more efficient. And as a result of that, you get a fairly good efficient growth and returns on capital. This is a playbook that we've seen happening. And for high-quality distributors being done in many different industries, and I think oil and gas is no different. I mean, this is private equity roll-up 101, right?

distributors, lots of leverage, roll them up and IPO into the public markets that love these. So the leverage point is quite interesting because up until recently, and we're going to get to that transaction, I'm sure. The company actually did not have a lot of leverage, so they were financing the transactions that they were doing were being done at a relatively low multiple, especially once you take into account the synergies that they have produced from the combined companies. And the company actually did not have a lot of leverage up until recently, and it's still doesn't, but now they do have some debts that they have acquired in this latest acquisition, which is kind of a big part of what's going on right now and what makes the company attractive

and the potential here. You know, I want to get to the acquisition. I want to get to the present day. I know you, I mean, one of the reasons you came on is because you pitched these at a conference and people, I think people came to you with like, Steve, this is a really good pitch. Go on the podcast and talk about the pitch. But I just want to back up a little. I remember this company, you know, this was spun off in like late 2014.

And that's kind of when I was like starting as a public markets focused professional investor, let's say. I remember this company getting pitched back then, right? Because what is every what is everyone like? Spinoffs, a spinoff that was like captive to one customer distribution, big role of it. Like everybody loved this. And if I just go, you know, there's been ups and down. But the stock spins off at 35 within. a year, it's trading at 13. And as you and I are talking today, it's trading at 16, 15 to 70, right?

So the stock is down from the spin and flat over like a 10-year base. So I just want to actually, what happened with, it hasn't, again, I know people who this spun off in the like 10% position, love this. This is going to the moon. Why hasn't this worked over the past 10 years? So I think that's where kind of the macro part of the story comes in. I doubt that also makes it quite interesting because 2014 happens to be probably the last peak of oil and gas investment globally. If we look at the United States and a number of rigs operating in the United, so let's step back for a second. What do they do for upstream and midstream? They sell essential parts, a lot of these are consumables for companies that are trying to get oil out of the ground.

In the United States, one of the ways that you measure the intensity of like how many people are looking for oil, a lot of it is in the shale spaces. Spaces. that we have in the country is we had back in 2014, there was 1,800 rigs in operation looking for oil and gas, trying to extract oil and gas. Today, that number is below 600. And that is the explanation for why the... So essentially, this company has been operating and we didn't own it in 2014, and arguably it was a good company, and we can discuss what happened after that and how much they have

done, essentially, how hard did they have to work? stay in place from a point of view of their earnings, kind of the earnings that they have generated in the environment in which the addressable market has shrunk dramatically. And this is not the type of company. If I would believe that this is the market that will continue to shrink from here, this would not be interesting to me. But I think there is something that's happening here, and I don't know if you feel comfortable switching to that right now, we can get on that later, but what is happening today in the oil

and gas markets, we have the potential to at least stabilize, if not to grow the investment into oil and gas from here. And I think the major reason for that is what is happening with the administrative Hormuz and in Iran. Because what, I mean, if you look at the historical periods of disruption, and we have to go back to the 70s where it was kind of similar, because you had the, when the Iranian Revolution, and then you had the Arab oil embargo, in both cases. What was distributed, what was impacted at the time was about 7% of oil and gas production in the world, in both of these cases.

And as a result of that disruption and the impact that it had in a global economy, what the world has realized is that they cannot, we, they, whoever, cannot rely on supply coming from a particular area when we have the supply in demand so tightly balanced. What are we talking about, like today, the daily consumption of oil is something like 102 million barrels per day, and the production is like 103 and 104. And the world is looking at say, oh, there's excess oil. But we also operate at 99% capacity in civilization. And when we have a disruption like we have today, where we have so 20%, so last time, when we're talking about it, 7% got disrupted. And that resulted in a massive investment in the oil and gas. exploration in other places not to be too dependent on the Middle East. And as a result of that

investment, which benefited a lot of companies around the world participating in the oil and gas investment, including the distributors who were there at the time, as a result of that, there was massive finds of oils, including the Gulf of Mexico, the lot of the field in Mexico and Cantorrell, the North Sea oils. All of those things weren't really on the map as far as where the oil was coming from before 1970s. And then, because the world realized that it cannot depend on one region, or at least not as much as that they used to, that exploration happened and investment happened.

So today we have 20% of the supply got disrupted, not seven, but 20. And I would argue that we saw the impact of that. You saw the airlines, the Asia, not really knowing where they're going to get the jet fuel on whether they can operate two or three months down the road. They seem to have worked out more or less, but there was kind of different reasons for why we had, despite the fact that 20% of the supply get disrupted, it looks like a lot of the inventors, especially from places like China, have they drawn down? But that is not sustainable. And you start seeing, because there's quite long retains from the time that you decide that you need to look for oil, and so you actually

start doing, start investing into it. So you're starting to see. changes as far as we started to see increase in investment as well. Because the current level of investment, if we go back to 2014, on a nominal dollar, in real dollar terms, is 40% below globally what was there in 2014. And it was just enough to kind of keep the oil at the level where the supply and match demand. If you want to have a bit more spare capacity in order to make sure that your economy doesn't go off the rails, you're going to start looking for oil in other places. And then we're starting to see that as well. So, like, in U.S., we're talking about the rig counts.

Right now, I think we're around something 590. We started six months ago. We worked 5'3. So we're already seeing about a 10% increase in number of rigs in the United States, which is actually helping companies like D now. You don't see that, so they just reported Q2, which they already show like a 10% growth and quarter of a quarter of a quarter in the U.S. various reasons, but I think it's just the beginning of what we could have seen from this company.

Let me hop in here. And I want to mention two things before I happened. Number one, you and I had this podcast planned a month, a month and a half ago. They reported earnings last week and the stock is up like 10 to 15 percent. And we'll talk price targets everything. So there is a jump. But I don't think, you know, I've had people come on and bit the stocks up 20 percent and they want to take a victory lap. I don't think you're taking a victory lap. I think, as you said, you think this is just getting He started. But the reason I mentioned last week's starting it is I read it to prep for this. And you could hear the CEO comes on and he's like, business is firing on all the cylinders. There's all this interest, all this or stuff. But let me try to gently push back on this.

Like, I definitely hear you, right? But at the same time, you know, even before this, I mean, you had 22 with Russia, Ukraine. Like, I don't think people thought there was like tremendous amounts of, like, I think we were drill, baby drill for a lot of part in the D now things. And if you were like, hey, the world is going to increase. investment in spare capacity and everything. I might say yes, I might say no, but is that really going to come from the U.S.? Like, is there so much slack in the U.S.? Is there so much? Because a lot, I mean, I know a lot of the energy bulls before Ukraine and before the Strait of Fremuz, they were pointing to U.S. shale and saying, hey, shale's kind of rolling over. All these wells are tapped out. We're actually going to start declining. So even if you are right on, hey, there's going to be this big investment

and like energy is all about signals, right? Oil at 80 is sending a signal, drill baby drill, oil at 60 or 65 is sending a signal, hey, you know, maybe run these for cash flow. Oil is at 80 right now. But even if it's drill baby drill, isn't that going to be happening outside the U.S.? Are you betting on this macro trend that is going to go somewhere else, I guess? No, there is. So it's a great question. I think it's going to be a combination of both, because I think people are going to be looking for oil anywhere that you can find. What's also interesting is that you did mention the oil prices of 60, 80, we saw 100, I can, where we're at around 90 today. What's interesting, if you look at the price,

of Brent out to 2030, so the futures, they actually haven't moved that much. Between, I think in January, we were at 65 and now we're something like 68. I haven't looked at these numbers in a couple of days. But what I looked at, it was surprising to me how complacent the world seems to be from a point of view of that the oil is going to be there by 2030. But from a short term, but like where does, actually, why we might see investment in places like Shale? Because these are the projects that have smaller upfront investment and faster payback period. And there are certain projects that may have been,

may be economical at 80, but not economical 60. And I think that's the type of things that's part of the reason for why you're seeing an increase in rigs in U.S. right now is because these are the type of projects that are being tapped. And also from a point of view of U.S. oil and gas rolling over, I think part of the argument there is that we've been growing. So what was interesting is that in U.S., he had the oil and gas production kept growing despite number of rigs coming down over the years.

So each rig was becoming more and more efficient, because it was trying to get more and more oil, essentially, it was becoming better extracting oil and gas from the same place. it seems like that may be starting to cap out to some extent. So then in order to keep the production at the same level, I think you might need to actually have more rings as well. So that's kind of like part of the argument there as well. But it's a, to me, I think we're getting so much into macro, but this is partially just a company specific story as well.

So if we're going to get the macro angle here, then I think this could work very well. But even without it, I think this is a company that has shown. And if you look at their results kind of like within the last five years or so, in the environment in which the oil and gas investment has been declining, they still managed to do pretty well. And they still manage to increase their profit margins. They still manage to increase their profitability as well. No, I completely hear you on the macro versus micro. It's just you, you talked a lot about the macro when you were.

And I'm just trying to follow where. the conversation goes, you know, let's turn a little bit more to the micro. So I think you laid up a big piece of it, the oil and gas, but you know, they did MRC, they did an MRC global acquisition. So I'll open the door here for you to talk about MRC global, but I will just know, it's funny. I had Claude go through all my notes as I was primed for this podcast, and it said, hey, you don't have crazy amounts of notes on DNO, but you have a lot of notes on MRC global from a couple years ago. And one of the notes says MRC global and D&A now would be a perfect fit. And MRC Global, on top of the oil and gas thing, they had, as you alluded to, a lot of midstream exposure.

And that midstream exposure is really interesting because they say on the call, hey, it got us a lot of water exposure and water maintenance and water projects. And it got us some data center exposure from the midstream, especially with the gas going to data center. And you know, you say water and data center, I think people's ears perk up. So I'd love to just ask you about the MRC denial merger overall. And I think that can get us to the IT integration, into the synergies, all that sort of stuff. and also some of the businesses that came with MRC Global that I think have like really, are kind of really where the puck is going.

So we can talk about those if that makes sense. Sure, yeah. So in terms of the combination of the two companies, I think you're absolutely right. Like if you look at it just purely on paper, the combination of the two companies make sense. So D now historically has been, actually, so it was an upstream and midstream,

so it is getting the oil out of the ground and the pipes. And then MRC was mostly in downstream and utilities. So downstream is petrochemical companies, refineries, et cetera, and utilities are utilities. Right. So this is, so what you're talking about, a supplier that all of a sudden would be able to cover the whole kind of oil and gas supply chain from getting oil out of the ground to getting the product or electricity into your home or into your business, et cetera. But within that, some things, actually, some of the parts are similar.

Some of the customers are similar. Other customers are different. So if you look at like, if you think about what does an oil well need versus what does a refinery need, it is not the same thing. Some parts, you know, some of it is pipes. Some of it is something very specific. And so from that point of view, the combination makes sense in terms of, okay, you can serve some things more efficiently. And also within MRC, they did have parts of the business

that was serving upstream and midstream as well. So I think the way the company has been thinking about is that what they would do is they would combine that part of the company of MRC with Dino. And then also and have the downstream and the utility business, that is kind of of added business in order that expands the size of the company and arguably makes the company more, would make the company more efficient, allow you to spread the GNA costs better, etc. Because they were talking about from the point of view of the combined company, they were never, as far as I remember, I don't think they were talking about cross-selling opportunities or

things like that, but they were talking about synergies from a point of view of efficiencies and talking about how the combined company could generate about 75 million. So if we look at 2024, that for last year that the two companies were separate, I think Dina had, let me just pull up my numbers, but Dina had about 150 million of Ibida, and MRC had 175 million of Ibida. And then they said that between the two, they would have about 75 million EBIDA of synergies. So actually meaningful numbers, it's about increasing the combined company, EBITDA by about 20%. And that was the logic behind the merger. So it does make sense to have the companies together, at least like strategically. But what happened in between is that while they were buying, while Dina was after Dino has agreed to buy MRC,

they also inherited not just this relatively synergistic business. They also inherited a ERP system implementation, which is, to put it, wasn't going too well. I mean, as soon as you say ERP implementation, right, and I'm reading and somebody asked a question about ERP or SAP, I can't remember. I mean, every investor, you see that and you're like, oh, my God, just put a gun my mouth right. You got to run. I mean, one day I'll learn my lesson, right? But whenever you see the ERP implementation quite often, you will see that there are, like, it's delayed. You're talking about, and especially for, why is it so meaningful for a distributor?

Well, distributor has low margins to start with. And it's a working capital efficiency business. So if you have something that disrupts your margins even by 2 or 3%, or if it disrupts your working, you cannot deliver your orders, or if you cannot, your inventory starts blown out because of this ERP implementation, it could be deadly if the business is not set up for it. But then the flip side is like, why do people do it in the first place? because we're not the only ones who are smart enough to figure out that ERP implementation is dangers.

The businesses that engage into it, they know that there's a value to be, like at some point, and this was the argument from MRC, I believe, is that before they engaged into this SAP, into this ERP implementation, which was actually an Oracle, they had a homegrown system that was kind of, they've put together, they developed it, and it was working well enough. but at some point the company has become too cumbersome and can elude it for them to continue using the same ERP. So they decided to bite the bullet. They found that the Oracle is the best solution for them,

and they went ahead with it. And then it turned out that getting from point A to point B was a lot more difficult than what they expected. And that's exactly when they were brought. Always this. Let me go to, okay, so you mentioned when we were talking, you know, the two separately do, I think it's $150 million on one side, $175 million on the other side of EBDA with their guiding to $70 to $75 million of EBDA. So, you know, separately the two businesses do $325 in EBDA with this energy.

You'd have them at about $400, right? I'm just looking at the numbers. 2025 the businesses do now they close entry year, but $227 million of EBITA is kind of the reported number. they're guiding this year to, I think it's $230 million, any bit out of this year, am I all? And then on the call, management is asked, and they say, hey, you guys have kind of given a target of $350 for 2020, for next year, right?

Now, I understand all the synergies haven't kicked in. I think they said on the call, like 30 of the 70 million are kicking in this year, but that would mean more kicking next year. When I see that $350 million number that they're talking about, like that's kind of what. what the businesses separate do in 2024. You know, the synergies are kicking in, I mean, probably 50 of the 70 year kick to next year, maybe more.

Like, I look at that and say, hey, 20204 wasn't exactly a banner year for oil and gas cap X. Why is 2007? Like Steve's here telling me the businesses with synergies did four, would have done 400 million in 2020. We're below that in 27. And this is a business where, you know, again, I mentioned the cues you call. It sounds like demand's going great. So why aren't we seeing this, like, kind of flowing through the EBITAN numbers right now? I think it's a great question.

I'll make it even kind of more compelling because what the company said when they were reporting 2025, which was kind of, and all of these problems that related to MRC was appearing, they said, if we were, Gene, I was saying, if we were a standalone company, we would make 200 million in 2025. So which means that, and we know that MRC the year before that made 175. So then the question, okay, what is happening there? And I think what's happening is that they are still, so what they, at first they had to throw quite, I think they were saying that they were throwing

about $8 to $9 million per quarter into what seems like to literally manually fill orders while they were figuring out the MRC ERP systems. So that was the case in the first two quarters of this year. And I said, okay, starting at Q3, it should be down to about a million and eventually it should be going out. So it suggests that they have stabilized.

I do think that they're being very conservative about the projections for next year because they're still in the middle of trying to figure out what the combined company is going to look like. And they do not want to be in a situation where they overpromise and order to deliver. And I think as far as,

and to your question, between if you would look at where we were in the middle of 2020, 25, and where we are, from a point of view of the demand, at the end of 2026, and may be halfway through the 2027, if you would ask just a question of, should these companies be making more money or less money? I think the answer should be more, right? So I think part of it is that they're being conservative, and they're still trying to figure

out, and they do not want to be in a situation where they disappoint the market again, which is what they did when they reported 2025 in the stock, when they reported all these problems with FRC and the stockback thing was down something like 40%. It was the same day within a couple of days, but it was a pretty massive drop. It's funny because I've got the 10-year chart pulled up and you can't even see a 40% drop on this. So I do see, as you're looking, January 30th, $15 per share, February 27th, 12. So clearly a big drop in there. Well, I think it was $17 before, like, starting the year, I was close. You're probably right.

It's because it's on the 10-year view just because I had to pull back. Let's go to valuation, right? So I've seen, I've had the benefit of seeing your value acts bail. So I know how you think about like kind of the long-term valuation, the 29 exit. And you are definitely, I'd love it if you talk about that. But I'll just frame. You know, as you and I are talking, the stock is trading between 16, 15 and 17. That gives it about a $3 billion market cap.

And they've got about, let's just round it up to make the number. is really simple. About 500 million of net debt. So 3.5 billion of EV, which I said round up because I said they've kind of soft-targeted $350 million plus of EBDA for 2027. So you're right at 10x EBDA on 2027 numbers on the numbers I laid up. Now, this is a distribution business. And one of the reasons people love private equity, love distribution business is A,

the roll-up opportunities, but B very low cap-backs, right? So on 350 million of EBDA, you're probably talking 20 million of capital. So, EBDA is a great proxy for unlovered free cash flow here. So I'll caveat with that. But, you know, when I say 3.5 billion EBDA, 3.5 billion EV, 350 million of next year, I don't say like, hey, super deep value. So I'd love for you to just lay out how you think about the valuation here. Sure.

So, and I mean, you mentioned value X, and I know we spoke before. So the way that I'm usually trying to think about the business is a front point of view of the free cash flow. and whether the free cash flow of these businesses are generating, then the big questions, what do they do with the money? And we can definitely talk about that. But to me, the free cash flow yield is the North Star, where I'm trying to figure out whether this company is being attractively priced or not.

And one other thing, not trying to get into the game of trying to figure out what this company is worth relative to its peers, I want to look at what has the market paid for historically for this company or for this type of company, what does the market pay for, usually pay for? And historically, this number was quite volatile, but it averages out that on average for D now, the market was willing to pay about 5 to 6% free cash flow. You also call it, I don't know, 17 times free cash, or 20 times free cash. So that was the kind of multiple that the market historically said, we're comfortable paying

for this business. Yes, it's volatile, but as you said, it's capital light. it's a quite a bit of it's very sticky business even like if you go back to what happened with MRC they barely lost any customers right so in the environment where their not your customer is not delivering to you the parts that they're supposed to if you're not leaving you're sticking and they barely lost any customers this like you've been reading through some tigos transcripts and talking to some of their clients you can realize that the customers stayed because a they were told okay, this is, we'll figure it out, but they will stay, you know, for them to try to figure

out an alternative, that would have been too different. So they, this is a sticky business. It's arguably high-quality business, and the market historically has paid about a 6% free cash yield. So if we're looking out to, even if we go with the 350 million number, and as you mentioned, there's their little CAP-X, the company with MRC, they inherited some debt before that there was no debt. Right now they're paying, I think, about $30 million a year in interest on that debt, on the MRC. They said that they will try to pay down. They are generating cash loan. They will try to pay that down, so that will probably go down to about $20 million.

But figure, with $350 million of EBITDA by end of 2027, this company should be making about $300 million of free cash flow. Yep, yep, absolutely. So that means on 2027, today you're getting about a 10% free cash flow yield. Well, 350, so I'll just do it in my head real quick. So 350 minus 20 capax is 330 minus 20 on your numbers of interest is 310. You know, we can talk about it if you should do that. But then they're going to pay taxes, right?

So aren't we taking 310 down to like 250 after tax? Am I thinking about that correctly? You are, but then you can add back the stock-based compensation. So like because that's a non-cash item, right? So from cash flow point of view, you're adding that back in. So it's a way that I'm, based on the numbers that I have, I think was coming out to be about 300 million of. Okay. Okay, that's cool.

And I do know they also have talked about, I mean, this would be one time, not sustainable, but they have talked about, hey, we've got another 50 million of inventory reductions to go and all that. Yeah. Okay. So that will go towards paying down debt, so that reduces the interest. Cool. So 300 million of cash flow is kind of what you're saying for 2020. Yes.

And that is on the EBITDA number that I would argue it should be relatively easy to achieve further. Yep. So, but, again, 300 million of free cash flow. So that's kind of an equity number. So this is a $3 billion market cap company. You know, I look at it and I say, okay, Steve Scott, historically this trades five to six percent free cash flow yield to equity. That's, you know, 17 to 20 times free cash flow. You're buying this at 10 times 2027 cash flow.

on one hand, that sounds attractive, right? That's people would do that math real fast. That's like a double if you get to the 20 extra free cash flow. On the other hand, you know, you look at the city, hey, distribution business, not a huge amount of growth and stuff. Like, why isn't the right number 10 is pretty low for a steady, high free cash flow business? But why isn't the right number 12? Why isn't it 14? Why isn't it 15?

Like, are we, it's relying a lot on multiple expansion, I guess is what I would say. It's a great question. I think that that's one of the key kind of the questions of what's going to happen here. And I think what helps with this company is that the way that they have been allocating capital in the past has been relatively efficient. So where does the capital has been going to? It has been going towards acquisitions, which up until MRC, if you look at the acquisitions that they have done, they usually have been, especially like after you include the synergies, they seem to be buying companies at about four to five times epitaph. Right.

So if you are a company that is able to. to buy and through your own efforts, because it's not available for everyone. If you're able to buy growth at four to five times you be done, and you yourself is trading at, I know, eight or nine, then through that you actually add, you're adding value. And you, and the price that you, the price that you're paying on, the free cash flow that you're getting in those positions is adding value.

You know, so that is something I always struggle with, right? This is the curse of the acquisitive compounder, right? If you're trading, take it to the super extreme. If you're trading for 100 times EBDA, people are baking in, like, these guys are going to be able to really roll up the industry accretively, right? Well, it does remind me of the 70s, right? Like, oh, we traded a high multiple. We issue stock to go buy stuff at a cheaper multiple, so we grow, so we get a higher multiple.

And I do hear you, these are accretive acquisitions, but how much do you build in the, how much you billion the value creation of that into the multiple? You know, it's just like a little chicken or the egg or like you kind of run into an infinite loop paradox. You're right, but I think that partially explains for why this company historically has been trading a 6% free cashly yield and not that. Right? Because we're going from a steady state zero growth business

to a business that is growing because partially, maybe because of the acquisitions that could be grown at 3% to 5% per year. And once you have that, that deserve a hirehold. The other interesting thing here, and I'm just pulling it up as we speak, but they do have a very balanced capital allocation program, right? As you said,

I don't think they want to run with much debt, but they do have some debt right now. They are paying back a little bit of debt, but they're also buying back stock while they're doing it. So you kind of get the nice of, you get all the worlds, right, where they bought back $75 million of stock in the first.

half of the year. And again, this is a $3 billion market cap company. They were actually lower when they bought it. They timed their repurchase very well. But buying $75 million in the first half of the year, $150 million a full year, like that's 5% of the company. So you get the buyback. You get a little bit of the debt reduction. And the debt reduction, you know, if you're valuing on the free cash flows equity story, decreases the interest expense, which lets you buy back more share. So you kind of get the best of all worlds. And by the way, they can keep doing some bulton acquisitions with the balance sheet and the cash flow they generate. So they've kind of got all of them at that point. Yeah, that's exactly it, right?

And if you look at the history of the buybacks that they have done, they weren't doing buybacks when they were trading at $30 a share. They were doing buybacks. They were trading at 10, 11, 12. And they leaned into it early. So they did kind of at the time, this was interesting and bolsey to some extent, is that at the time when they were going through this massive problem of ERP implementing, trying to figure out the ERP implementation for MRC,

they still had enough confidence to say, okay, we're going to take 50 million, and the working capital was growing. They said, okay, we're going to, we have enough confidence in this business to buy back $50 million worth of shares in Q1 because they wanted to take advantage of the share price being at Rulant 11, or 12, or over it was at the time. So they've been opportunistic and historically have shown to be pretty smart about when they're buying back shares. You know, the other thing here is, David, as an Eastern European, you might be able to say his last name better than me, Chichenowski.

Is that it? Yeah, that's close enough. He owns like, he owns a million shares, I think, over a million shares. And, you know, with the stock at $16, that's $16 million, $16 million, $16 million of stock ownership, I think it gets paid nicely. but you do have a decent bit for a spin-off or a company that's kind of, not capital-intensive, but that's grown through acquisitions,

spin-off, like, you do have a decent bit of insider ownership just through that piece. It's not huge, but it's not. What else should we be talking about here? No, I think we covered most of it. I think there is one question that people would have, because, so once again,

not to get too much into the weeds, because we're trying to, If you talk, if you, because obviously in the last couple of calls, a lot of the questions were about, again, what is the company going to be doing as far as the ERP? And why did they buy the company, which was installing it different? Because D now itself is on SAP, ERP, and what Oracle was, MRC was installing Oracle. So they knew, they came into it knowing that is going to be two different systems. I don't think they realized how bad it was going to be, but they came into it knowing that was two different systems. And what they're saying now is quite interesting is that they're going to move some of the centers,

and they already moved 17 out of the 20 that they were expecting to move to SAP. Well, they're going to keep the others on Oracle. And it's a question like, why is that? And I had some conversations with people like at the consulting companies that normally do these type of implementations, trying to figure out, okay, is this normal to run companies side by side, two different ERP systems side by side? And what I was told is that, like, it really depends on what kind of business this is. And in some case, it could be the case that the Oracle ERP is the best for a particular type of business.

And this is just another reminder that the business that they got into with MRC, which is more downstream and utilities, it is a slightly different business than upstream. And that's why there's going to be, they're deciding to keep that Oracle ERP for that one for now and try to make it. work. And this is the business that, you know, the MRC management has made a decision to improve their own business before it was being bought by Dino by implementing this. So there's a lot of moving parts here. But I think given the macro background switching from a headwind to a tailwind, and the people who are involved here with David Cherishinsky being there, he's been at Dino, I think,

over 25 years and has a pretty good history of prior acquisitions that they've made in the past. You're getting into a station in which there's a few ways to win from here. And yes, the stock has done a little better since they've reported Q1 and they showed Q2 stabilizing. But you kind of could be in a situation in which things might start going the way that, the right way for the company, as opposed to kind of swimming against the tide, which they've been doing since they've listed. It's, I mean, as I was looking for the beneficial ownership, it is funny because just to what you're saying, they've got a little thing that says, hey, since we spun off like, U.S. rigs were 1,907 rigs when we spun off in the U.S.

And that's 571 at the time that they were kind of writing their proxy. And you look at that, you're like, hey, as you're saying, this company has been running into headwinds. And I don't think anyone's calling for 1900 rigs in the U.S. again. but if you just stabilize and start ticking back up, like the financials could really shine through here. And it's still a highly fragmented industry here, right? So yes, we had the combination of the two largest players, but I don't remember the market share numbers,

but I know that it's below 20%. Do you want to talk real quickly about your 2009 price target just so people can see why you're so excited about this and maybe get as excited themselves? Well, so it's really, we already talked about it to some extent, but when I was looking at 2029, it's just a matter of what kind of companies can be earning on a free cash flow basis.

And then if you put a 6% free cash flow yield multiple on that, that you can get to about 30, easily to, by 2028, 2029, you can get to about $30, $32 per share. Do you think this company should be public? It's a good question. I think if the being public lowers its cost of capital, then yes. but if it does not,

then maybe this is given how volatile the business they're in, maybe it should be private. I just ask because, again, a through line of this conversation has been private equity loves these businesses. Yeah. They slap a lot of leverage on them, and then they do the roll-up that you're talking about, right?

And this is a business where the management team does not want a lot of leverage. They're paying their leverage down. I think they're paying their leverage down. leverage down, you know, correct me for wrong, I think they're going to be well under 2x. They're already well under 2x. But they're going to be well under 2x suffering. If this was a private equity portfolio company, four to six probably is where they'd be levering this thing up.

That would create a lot of tax shield on the interest rate. They'd really juice the equity. And I say that because, A, I think there would be private equity interest and B, when you look at the shareholder roster and I won't call out any specific people, but you've got a lot of shareholders who I remember. were involved in MRC, and they were saying MRC belongs with either D now or a private equity firm. And they, in the past quarter or two, I see a lot of firms that have been adding to D now. And I have to imagine part of their thought is this would be either better as a private equity controlled company or run like a private equity company in the public market.

I am guessing to some extent that for private equity to get involved in the satire this, they would want to see a growth in an address boomer. that you do not, because the flip side on what happens when you have a high-de-levered company in the shrinking market, when you have a melting ice cube, and it got a lot of people into trouble, both in public and private markets. So I don't think people want to touch that.

I do agree with you, but I think I might push back just because, again, they're talking about the data center growth, and that's real, and the midstream play in particular has a lot of it. And they're talking about the utility growth and the water growth. And again, those are real, and those really play into the data center side. So I could see a private equity firm kind of saying,

the rig side is our base, and if we get any upside there, that's the chair on top. But let's lever this up and we're going to get growth from the midstream and the data center and all that sort of stuff. Let's lever this thing up and kind of take that growth, and we'll get a chair on top. We'll get a call option on oil and gas exploration, if that makes sense. Yeah, look, there's, you look at all the distribution company that I like Westco, which is an electric electric parts distributor, that all of a sudden has become. come a play on data centers.

So, A, their sales have got, they went from a business that was growing, I'll call it to 3% per year to 8, 10% per year, and multiple expanded, right? So you could see, once again, I'm not in any way underwriting this scenario, but they are in, this company, Dino, especially with addition of MRC, could be in all the right places if we're going to see the right, the type of investment that is being talked about in utilities and refineries and data centers, et cetera, if that's all going to come to fruition over the next five years and or upstream oil and gas, they should benefit.

And then we talked about the numbers, kind of what did the two numbers, the companies look like on standalone basis, even before the synergies and even before all of this change into that. Just on your point on Westgo, it is crazy because I was flipping through some other distributors, you know and every again every investor you say this is just my personal experience when you're 25 somebody says distributors and like that's the dumbest most boring business and then when you're 30 like what's the try to fast know look like again and then by the time you're 35 and you're like oh like you kind of get why you're I love distributors you don't do a lot distributors you you mentioned

Westcoe fastnell you know fast now over the their organic growth has accelerated I think from like basically rounds to zero to high single digits low low double digits because there's this huge AI boom and like all these distributors are just they are enormous beneficiary not in a memory stock way but probably in like a more sustainable way forget just step back why why a distributor is interesting right so you you have business who's saying your margin is my opportunity nobody wants to get involved in a business that delivers to you three five six percent EBDA margin yeah because in order for you to do that you have to do really well and the all you get is 3, 5, 6% EBITDA margin, right?

So you're not sure a level of competition of people. I don't think you're going to have a lot of people saying that, oh, I want to build the new D now. Look, and the low margin, it is opportunity because, you know, you think of some of these guys, like, it's like, hey, if you, if we uninstall the box and someone comes and installs the box, well, the customer payback period is like three years. So that's eating, like, it's just a terrible business,

except for the guy who's already installed in there. who's been with you for 20 years. And by the way, do you want to risk? You lose the guy who's been selling, this is more fast now, the guy who's been selling you screws for seven years. I'm sure he's not your best friend, a plastic surgeon with the guy who's selling him Botox.

But you know the guy, your screws are always there. If your screws aren't there, you lose a day on the job. So you lose tens of thousands of revenue for a $2 screw. Like, no, and it's kind of risky. With upstream oil and gas, you take it to the next level. Like what happens when you can't pump for it?

that you lose a lot of money. And by the way, for a screw that costs nothing and the cost nothing and the cost making a 5% not margin, not margin on it, you know, it's like it's not a lot. Steve, this being great. Appreciate you coming on. Time number three, two more. And we're going to have to get you that. No, you already have that.

I have to have that. We'll get you a follow for two more. But this has been awesome. Do you want to include a link to the write-up or anything somewhere that I should link to? or we can talk about that online. We can talk about offline, but yes. If he decides to, they'll be linking the show notes. If not, you can just go, you know, they've got the presentation.

They've got the earnings call and everything. So Steve Grelick, Barbara, this has been great, and we will chat soon. Sounds good. Thanks again. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.