Buy Systemax Inc. (NYSE: SYX)

Target: $36

Buy Up To: $30

Options Trade: Although Systemax trades options, they are very thin, and the calls are quite expensive. I am waiting for the volatility in the stock to quiet down before offering an option recommendation.

Rationale:

Systemax is undergoing a draconian transformation of its business model. This industrial product and equipment distributor closed down its unprofitable consumer electronics business last year to focus on improving profits of its basic business.

I’ve been watching Systemax for a bit and fruitlessly hoping for a pullback in the stock before recommending it. The stock has received more attention as investors realize it has shed a money-losing operation and is now growing sales of its most profitable products.

The remaining business distributes industrial materials, equipment, and furniture to commercial and government customers. Despite Amazon taking over most the distribution of most consumer products, many commercial and especially government customers require special handling that Systemax delivers.

Profits are exploding as sales of its private stock products increase as a percent of revenue. These products generate profit margins more than double the level of those where Systemax acts as a simple distributor.

The stock has only one analyst covering it and management gives little earnings guidance, which makes analyzing estimates a bit tricky. My assumptions get the company growing earnings 20% to at least $1.80 in fiscal 2019.

My $36 target attaches a P/E multiple of 20 on fiscal 2019 estimates. Now that the stock is creeping above $1 billion, it will hit the radar of large investment firms and may attract more sell-side analysts’ attention.