Anixter International Inc. (AXE), Rockwell Automation (ROK), Watsco Inc (WSO): Watch Out for Possible “Wholesale” Value Traps

The electronics-wholesale industry is in a strange place right now. Dealing with decreased consumer demand during the recession and a corresponding reduction in corporate spending, there have been some rough times in recent years. Are the following companies value traps, or just good companies going through a rough patch?

Not shooting for the stars

Anixter International Inc. (NYSE:AXE) operates in 50 countries, which helps to broaden its base beyond regional issues. If a problem develops in one country, this kind of diversification is pretty good protection against it. Since Anixter International Inc. (NYSE:AXE) is doing $6.2 billion in sales, it’s obviously got some solid markets on tap. With countries like China and India growing explosively and infrastructure projects in Africa beginning to take root, there is definitely room for expansion.

Unfortunately, despite all of the recent growth, Anixter International Inc. (NYSE:AXE) isn’t doing so well. The company is only pulling 1.8% profit margins even with so many growth sectors in wire, communications, and security equipment. Further, Anixter International Inc. (NYSE:AXE) appears to have cut off one of its best future routes to growth when it sold its aerospace hardware division to Greenbriar Equity in 2011.

In spite of these issues, Anixter International Inc. (NYSE:AXE) is still trading at 2.5 times its book value and 23 times its earnings, which is far higher than the S&P 500. So I’d suggest giving Anixter International Inc. (NYSE:AXE) a pass for the time being.

Greasing the wheels of progress

Rockwell Automation (NYSE:ROK)

Rockwell Automation (NYSE:ROK) works to make companies operate more efficiently through automating processes with hardware and software. As such, the company is doing reasonably well in spite of the recent economic issues. Pulling 11.6% profit margins, paying a 2.4% dividend and only trading at around 17 times earnings — less than the S&P 500 as of this writing — Rockwell Automation (NYSE:ROK) appears to have things under control.

Investors should appreciate that Rockwell Automation (NYSE:ROK) is constantly applying for patents and protecting its methods of innovation. As of this writing, the applications include a re-teachable non-contact switching circuit, a scalable automation system and a natural convection cooling system using induction. The company is downright aggressive about this IP protection. In May, Rockwell Automation (NYSE:ROK) applied for 33 patents.

Overall, the fact that Rockwell Automation (NYSE:ROK)’s business model appears to be all about helping other businesses presents a sturdy moat of patents and contracts. As most every business seeks to streamline itself, Rockwell Automation (NYSE:ROK) appears to be a fairly solid investment moving forward.

Chill out for a second

Watsco Inc (NYSE:WSO) is on an aggressive campaign to cool the world. The company has moved through much of the US, and a few years ago began a partnership with Carrier to work in Puerto Rico and much of Latin America. Between refrigeration-unit brands like Frigidaire, Whirlpool and Comfortmaker, Watsco Inc (NYSE:WSO)’s got a lock on keeping people and goods cool. Being a cooling business that’s headquartered in Florida and dealing in tropical zones, this sounds like a highly profitable gig.

Unfortunately, there are issues. Watsco Inc (NYSE:WSO)’s growth has come at the cost of diminished profit margins. The company is confident enough to pay a 1.1% dividend, even though the overall profit margins are only 3.1%. This could spell trouble if the company makes a misstep into one of its new markets. Since Watsco Inc (NYSE:WSO) is trading at around 30 times its earnings at the moment, I would recommend you keep your eye on the company and watch for either a sizable dip in the price or a strong improvement in earnings.

The Foolish bottom line

There are values to be had in the wholesale-electronics business. However, contracts and major labels aren’t everything. Some of these companies are better bargains than others, and some might need to be dropped in exchange for something shinier.

The article Watch Out for Possible “Wholesale” Value Traps originally appeared on and is written by Chris Hodge.

Chris Hodge has no position in any stocks mentioned. The Motley Fool recommends Watsco. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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