Executive Summary / Key Takeaways

• DXP Enterprises is demonstrating robust financial performance, achieving record sales and sustained 11% adjusted EBITDA margins, driven by strategic diversification and an aggressive acquisition strategy.
• The company's Innovative Pumping Solutions (IPS) segment, particularly its DXP Water platform, is a significant growth engine, showing consistent sequential sales growth and strong backlogs, contributing to overall margin expansion.
• DXP's competitive edge stems from its integrated service programs, technical expertise in custom pumping solutions, and a strategic focus on high-value MRO products and services, differentiating it from broader industrial distributors.
• Despite macroeconomic uncertainties, including tariffs and inflation, DXP maintains a positive outlook, expecting continued sales growth beyond market rates and further operational efficiencies, supported by a robust acquisition pipeline.
• Key financial highlights include a 11.8% year-over-year sales increase and a 17.6% adjusted EBITDA increase year-to-date through September 30, 2025, with strong free cash flow generation and a healthy liquidity position.

DXP's Enduring Industrial Prowess and Strategic Evolution

DXP Enterprises, Inc., founded in 1908, has evolved into a critical business-to-business distributor of maintenance, repair, and operating (MRO) products and services, alongside its specialized role in integrated, custom pump skid packages, pump remanufacturing, and the manufacturing of branded private label pumps. Operating through three core segments—Service Centers (SC), Innovative Pumping Solutions (IPS), and Supply Chain Services (SCS)—DXP strategically positions itself within the industrial landscape as a provider of essential, often mission-critical, solutions. The company's overarching strategy is to be a customer-driven expert, helping clients manage MRO spend, enhance uptime, and boost productivity. This foundational approach has shaped its current market position and strategic responses to a dynamic industrial environment.

The industrial distribution sector, while mature, is undergoing transformation driven by technological advancements and evolving customer demands. Broad industry trends, such as the surge in AI and data center development, are creating new demands for power, cooling, and water infrastructure, presenting significant opportunities for DXP's pumping and filtration expertise. DXP's historical journey, marked by a compounded annual sales growth rate exceeding 15.7% since 2020, underscores its ability to adapt and thrive. This growth has been fueled by a deliberate strategy of end-market diversification and capability expansion through both organic initiatives and strategic acquisitions, moving beyond a historical reliance on the oil and gas sector.

Technological Edge and Innovation

DXP's competitive differentiation is significantly underpinned by its technological capabilities and innovative service offerings. At its core, DXP excels in fabricating and assembling custom-made pump packages and manufacturing branded private label pumps, providing highly engineered solutions tailored to specific customer needs. This capability offers tangible benefits, enabling clients to achieve optimal performance in complex industrial applications. The company’s expertise in rotating equipment, fluid power, and filtration positions it to deliver robust solutions for challenging industrial environments.

Beyond physical products, DXP leverages technology through its integrated service programs, which form a crucial part of its competitive moat. Programs like SmartAgreement, SmartBuy, SmartSource, SmartStore, SmartVend, and SmartServ are designed to streamline procurement, optimize inventory, and enhance supply chain efficiency for customers. For instance, SmartSource provides on-site procurement and storeroom management, offering a more targeted and efficient inventory management solution compared to broader distributors. The company has also embraced digital transformation by adding an e-commerce channel, catering to a new generation of customers who prefer electronic purchasing of pumps and parts. Furthermore, DXP's Supply Chain Services segment has invested in a customer care model that utilizes remote technology, extending its reach to smaller sites and expanding business relationships without requiring a full-time on-site presence. These technological differentiators contribute directly to DXP's financial performance by fostering stronger customer loyalty, driving recurring revenue, and potentially leading to superior margins through enhanced value propositions.

Competitive Positioning: Outperforming in a Dynamic Market

DXP operates within a competitive landscape populated by large, diversified industrial distributors and more specialized players. Key direct competitors include W.W. Grainger, Inc. (GWW), Fastenal Company (FAST), MSC Industrial Direct Co., Inc. (MSM), and Applied Industrial Technologies, Inc. (AIT). While these rivals offer broad MRO products and services, DXP carves out a specialized niche, particularly in energy and industrial sectors, by emphasizing integrated services and technical expertise.

Compared to W.W. Grainger, which boasts a vast distribution network and strong e-commerce presence, DXP's custom pump packages and tailored MRO solutions offer a more specialized, end-to-end value proposition for complex industrial needs. DXP's focus on niche markets, such as water and wastewater, allows for deeper technical proficiency and adaptability. Against Fastenal, known for its efficient vending solutions and local branch network, DXP's comprehensive supply chain management and custom fabrication capabilities provide a broader scope of support, potentially fostering stronger customer loyalty through holistic problem-solving rather than just product delivery. While direct quantitative comparisons with all competitors are challenging to ascertain, DXP's gross profit margin of 31.52% (TTM) and EBITDA margin of 9.26% (TTM) demonstrate solid profitability within the sector. DXP's EPS is expected to grow 17.5% in 2025, significantly outpacing the industry average growth of 4.6%, indicating a strong competitive performance.

DXP's strategy of combining the scale of a large company with the agility of local businesses, coupled with its unique technical product and service offerings, allows it to deliver superior value to customers and suppliers. This approach has enabled DXP to outperform its peer group, which generally experienced negative or no growth in fiscal 2024, while DXP achieved 7.4% sales growth. The company's competitive advantages, or "moats," include its integrated service programs that drive customer loyalty and recurring revenue, and its technical expertise in pumping solutions, which provides superior performance in demanding industrial applications. However, DXP faces vulnerabilities such as potential supply chain dependencies and a focus on niche markets, which could limit scalability compared to broader distributors. Despite these, DXP's strategic positioning and technological differentiation allow it to maintain a strong competitive standing.

Financial Performance: A Story of Resilient Growth and Margin Expansion

DXP Enterprises continues to deliver a compelling financial narrative, marked by resilient growth and expanding profitability. For the three months ended September 30, 2025, total sales increased 8.6% year-over-year to a record $513.7 million. Year-to-date through September 30, 2025, total sales are up 11.8% and adjusted EBITDA has increased 17.6%. The last twelve months saw sales reach $1.6 billion and adjusted EBITDA hit $217.1 million, translating to an impressive adjusted EBITDA margin of 11.1%.

Despite strong revenue performance, DXP reported Q3 2025 adjusted diluted EPS of $1.34, missing analyst forecasts of $1.44. This miss, though modest, led to a significant 17.74% decline in the stock price in after-market trading. This market reaction highlights investor sensitivity to profitability metrics, even when top-line growth is robust.

Gross profit margins for Q3 2025 stood at 31.4%, a 50 basis point improvement over the prior year, reflecting consistent gains over the last two years and the accretive impact of recent acquisitions. Operating income for Q3 2025 increased by $4.1 million to $43.7 million, primarily driven by the Service Centers segment. While selling, general, and administrative (SG&A) expenses increased by $11 million to $117.6 million in Q3 2025, this was largely attributed to investments in personnel, technology, and acquisition support, reflecting a growth-oriented strategy rather than uncontrolled costs.

Liquidity remains robust, with $123.8 million in cash and $153.4 million in ABL Revolver availability as of September 30, 2025, totaling $277.3 million in liquidity. The company's refinancing of its Term Loan B in Q4 2024, which reduced borrowing costs by 100 basis points and raised an incremental $105 million, further strengthens its capital structure for future growth. Free cash flow for Q3 2025 was $28.1 million, up 15.4% year-over-year, demonstrating the company's ability to generate cash even amidst elevated, growth-oriented capital expenditures. DXP's return on invested capital (ROIC) at 33% at the end of Q3 2025, measurably above its cost of capital, highlights the effective deployment of capital and the accretive impact of its strategic initiatives.

Segment Deep Dive: Diversification Driving Strength

DXP's three segments each contribute uniquely to its overall performance and diversification strategy:

Service Centers (SC)

The Service Centers segment is a cornerstone of DXP's resilience, providing essential MRO products and services to a diverse industrial customer base. In Q3 2025, SC sales grew 10.5% year-over-year to $350.2 million, marking its strongest quarter in the last ten. This growth is fueled by internal initiatives, including expansion into technical products like automation and new pump brands, and penetration into new markets such as air compression and data centers. Regions like South Central, California, and the Texas Gulf Coast have shown notable year-over-year growth.

Innovative Pumping Solutions (IPS)

The IPS segment is a key growth driver, particularly through its DXP Water platform. IPS sales surged 11.9% year-over-year in Q3 2025 to $100.6 million. DXP Water now accounts for over 54% of IPS's year-to-date sales in 2025, up from 28% in Q1 2023, and has achieved its eleventh consecutive quarter of sequential sales growth. The segment benefits from strong backlogs in both energy and water/wastewater projects, with the Q3 energy-related backlog, despite a slight decline, remaining above long-term averages. Acquisitions in the water space, such as APSCO, LLC and Triangle Pump Equipment, Inc., are strategically enhancing DXP's capabilities and geographic reach in this high-growth market.

Supply Chain Services (SCS)

The SCS segment focuses on optimizing customer supply chains and inventory management. While SCS sales declined 5% year-over-year in Q3 2025 to $63 million, primarily due to customer facility closures, the segment is actively adding new customers. A large new contract, which turned profitable in July 2025, is expected to generate over $20 million in sales over the next 12 months. Despite anticipated seasonality impacting Q4 2025, management projects a stronger outlook for Q1 2026 and beyond, driven by increasing demand for SCS's proven technology and efficiency solutions.

Strategic Initiatives and Future Outlook

DXP's future is anchored in a clear strategic roadmap centered on aggressive growth and diversification. The company aims to double its business size over the next 3 to 5 years, a goal supported by a robust acquisition pipeline. DXP has already completed five acquisitions year-to-date in 2025, with two more (APSCO, LLC and Triangle Pump Equipment, Inc.) closing subsequent to Q3. The company plans to close a minimum of three additional acquisitions by Q1 2026. These acquisitions are not random; they are strategically chosen to expand platforms, geographic coverage, and end markets, particularly in the accretive water and wastewater sector.

Management anticipates continued sales growth exceeding market rates in the near future, driven by both organic initiatives and acquisitions. A key financial target is to maintain adjusted EBITDA margins at 11% or more, with a long-term aspiration to reach 12%+. This outlook is supported by assumptions of sustained demand in diversified industrial markets, continued strong project revenues in IPS, and the ramp-up of new customer contracts in SCS. Capital expenditures are expected to lessen over the next one to two quarters, tapering off in late 2025 and into 2026, as significant investments in facilities and software are completed. Analysts forecast DXP's EPS to reach $5.8 in fiscal year 2025 and $6.69 in fiscal year 2026, reflecting confidence in the company's growth trajectory.

Risk Assessment: Addressing Headwinds with Agility

While DXP's outlook is positive, the company operates within a global economy characterized by elevated volatility and uncertainty. Macroeconomic factors, including geopolitical developments, interest rate changes, and inflationary pressures, pose ongoing risks. The potential for new tariffs to disrupt global supply chains is a concern, though DXP's management asserts its ability to manage these challenges by passing on price increases and leveraging its deep product knowledge to offer cost-effective alternatives to customers. David Little, Chairman and CEO, explicitly stated that DXP is "not in the business of eating tariffs" and is "passing them all on," while noting that at this point, they are "not seeing any effect on demand" from tariffs.

Specific risks include an ongoing IRS examination of DXP's 2018 tax returns, which could potentially result in a loss of federal income tax credits for research activities. Additionally, the Service Centers and IPS segments are correlated with industrial production and GDP growth, making them susceptible to economic contractions. The Supply Chain Services segment faces seasonality, with fewer billing days during holiday periods. Despite these headwinds, DXP's diversified end markets and proactive management of operational efficiencies are designed to enhance resilience. The company's successful remediation of all material weaknesses in its accounting and finance department also underscores its commitment to robust internal controls.

Conclusion

DXP Enterprises stands as a compelling investment opportunity, demonstrating a powerful blend of strategic vision, operational execution, and financial resilience. The company's deliberate pivot towards diversification, particularly through the rapid expansion of its DXP Water platform and the consistent performance of its Service Centers, is yielding tangible results in the form of record sales and sustained 11% adjusted EBITDA margins. DXP's technological differentiation, embodied in its custom pumping solutions and integrated supply chain services, provides a distinct competitive advantage, enabling it to outperform a peer group facing broader market stagnation.

Despite a recent Q3 2025 EPS miss that triggered a stock price decline, DXP's strong revenue growth and positive future EPS forecasts underscore its underlying strength. Management's proactive stance on pricing, efficiency, and capital allocation, coupled with a healthy balance sheet and robust free cash flow generation, reinforces the investment thesis. DXP's journey from a traditional distributor to a diversified industrial solutions provider, driven by innovation and strategic acquisitions, suggests a future of sustained growth and enhanced shareholder value, with analysts maintaining a "Buy" consensus and projecting significant upside.