Weekly #71: DXPE’s Water Segment Is Carrying
Portfolio +12.9% YTD, 3.0x the market since inception. Plus DXPE's IPS keeps accelerating, margins are holding, and the “oil-and-gas stock” narrative keeps dying.
Hello fellow Sharks,
This week, we continued expanding our outperformance over the S&P 500. YTD, the S&P 500 is down -0.5% while the portfolio is at +12.9%. If you want to skip straight to the numbers, jump to the Portfolio Update.
This week we celebrated our daughter’s first birthday. So it was a hectic week (couple of weeks actually).
Also, we had a busy earnings week with seven companies reporting and only one missing EPS consensus estimates. This week, I go over the DXPE results.
Enjoy the read, and have a great Sunday.
~George
Table of Contents:
In Case You Missed It
On Feb 23, I sent a trade alert and started a new position.
Four days later, on Feb 27, the stock was already +20% after the company put up solid earnings and a strong outlook.
On Feb 27, I published the investment thesis for paid subscribers.
The setup is simple, and it’s one I’ve made money on before: the market sees a “commodity-like” business and concludes it must be uninvestable. That’s lazy. In these industries, the edge rarely comes from a magical product. It comes from execution.
Most people obsess over “moats.” In this corner of the market, process is the moat.
Earnings Results: 5/7 Estimate Beats
This week, two out of the seven companies reporting earnings missed EPS consensus estimates. Below are my thoughts on DXPE’s earnings and the revised valuation. On Wednesday, I will publish my thoughts on STRL’s earnings.
Paid subscribers can read the detailed earnings analysis here.
Thought Of The Week: DXP Enterprises (DXPE) Q4 2025 Earnings Review
Last November, I called the 20% post-earnings selloff after Q3 an overreaction. The market panicked. I wrote about it here.
The Q4 results released last week validated that call, even though Mr. Market didn’t like the results.
DXPE beat on both revenue and EPS. Record full-year sales. Record adjusted EBITDA margins. Six acquisitions closed. Three more closed after year-end. The company I called a hidden MRO powerhouse back in February 2025 keeps delivering.
One thing still needs watching: the energy backlog. More on that below.
The Numbers
Q4 sales hit $527.4 million, up 12.0% y/y and $28.4 million ahead of consensus.
Diluted EPS came in at $1.39, a $0.09 beat.
Adjusted EBITDA reached $59.0 million at an 11.2% margin; that matches the Q2 high and is better than Q3’s 11.0%.
Gross margin was 31.6%, the strongest quarter of the year. SG&A as a percentage of sales ticked down slightly. The one-off insurance and claims costs that crushed Q3 EPS did not repeat at the same scale in Q4.
For the full year, the picture is even cleaner:
DXPE generated $54 million FCF in 2025. Not bad for a company also spending $61.7 million buying six other companies during the year.
The balance sheet improved in Q4. DXPE refinanced its Term Loan B, raised an incremental $205 million in capital, and cut borrowing costs by 50 basis points (to SOFR plus 325). Net debt ended the year at $543 million; the secured leverage ratio sits at 2.3x against a covenant of 5.75x. Room to move.
Segment Breakdown
Service Centers is the biggest engine; $1.37 billion in full-year sales, up 11.0% y/y. Regions that drove year-over-year growth include the Ohio River Valley, Southeast, Texas Gulf Coast and California. Air compressors, metalworking and US Safety Services all posted strength.
IPS is the fastest engine; sales were up 26.4%. The water side of IPS deserves special attention. DXP Water now represents 55% of IPS sales, up from 46% in 2024 and 22% in 2023. The e-commerce channel hit a record year. Energy-related IPS remains meaningful, but water is the growth driver.
SCS posted a 1.4% revenue decline. Customer site closures and reduced activity at oil-and-gas-related facilities drove the softness. The segment’s 8.7% operating margin held steady. Management expects SCS to grow in 2026 as new customers onboard.
In Q4 specifically, IPS ran an 18.0% operating margin; Service Centers ran 13.9%. Those two segments alone show why the broader mix matters.
What the Earnings Call Revealed
Zach Marriott from Stephens asked the two most useful questions of the call.
First, he asked for monthly sales trends. The CFO broke it down: October averaged $7.5 million per day; November, $8.2 million per day; December, $9.8 million per day; and January 2026 came in at $6.9 million per day. January is always DXPE’s slowest month, and this January was up 2% y/y. The CFO added that “February is shaping up” well. Nothing alarming in those numbers.
Second, he asked about margins in Q1 versus Q4. The CFO declined to give specific guidance; that’s consistent with how DXPE always operates. But he pointed out that water acquisitions remain margin-accretive and that three acquisitions closed in Q4 (APSCO, Triangle Pump, Pump Solutions) should contribute positively to Q1 margins if their due diligence profiles hold.
The energy backlog question came up last. Management was transparent: Q4 saw another 9.3% decline in the energy-related average backlog from Q3; that’s two consecutive quarterly declines. The backlog still sits 36.9% above 2024 year-end levels. But the trend is worth watching. CEO David Little put it plainly: there’s been a lot of quoting activity; projects seem to be on hold; he suspects it’s political in part. He expects things to “start being turned loose” in early 2026, which would show up in sales toward year-end 2026.
Checking the Original Thesis
When I wrote the original DXPE thesis in February 2025, I set a sum-of-parts fair value of $156 per share using a WACC of 9.0%. I flagged four main risks: SCS weakness, rising SG&A, leverage, and tariffs.
Here’s how each played out.
SCS weakness: It remains real but contained. SCS is 12.5% of total revenue. It declined 1.4% for the year. Management is managing it rather than ignoring it.
Rising SG&A: SG&A came in at $459.1 million for 2025, up $48.2 million from 2024. As a percentage of sales, it fell slightly to 22.8%. The Q3 cost spike did not persist into Q4. The leverage I expected is showing up; operating income grew 21.7% on 11.9% revenue growth.
Leverage: Net debt to EBITDA sits at 2.3x; my target was below 3.5x. DXPE is comfortably inside that band even after raising $205 million of incremental debt. The refinancing reduced interest costs, which helps.
Tariffs: DXPE has not called this out as a major headwind in 2025 earnings. It remains a risk for 2026, especially for imported pumps, valves and bearings. Management noted inflation dynamics and supply chain variability as things they’re watching.
The diversification thesis is fully validated. Energy is now just 22% of DXPE sales; water and wastewater is 15%; general industry is 15%; chemical is 10%; food and beverage is 7%. Three years ago, DXPE was seen as an oil-and-gas play. It isn’t anymore.
Since I published the original thesis in Feb 2025, the stock has surged +48%. The thesis is intact.
The Energy Backlog Question
Two consecutive quarters of energy backlog decline sound alarming. Here’s why I’m not panicking yet.
The backlog still sits well above the long-term average. Think of a bucket that has been filling up for two years; it’s now 36.9% fuller than a year ago. Some water spilled out in Q3 and Q4. The bucket is still fuller than it’s ever been.
What’s causing the dip? Management pointed to customers putting projects on hold. There is a lot of quoting activity; that means companies are interested, they’re just not signing yet. If that changes in Q1 or Q2 of 2026, energy revenue would follow, back-end weighted to the second half of the year. That’s the management expectation.
January’s energy backlog will be the next data point. Watch the Q1 2026 call closely.
Looking Ahead to 2026
DXPE closed three more acquisitions after year-end: Mid-Atlantic, PREMIERflow, and Ambiente H2O. All three will start contributing in Q1 2026. Management expects to close at least one to three additional acquisitions by mid-year.
With $303.8 million in cash and $457.3 million in total liquidity (including an undrawn ABL), the balance sheet is loaded for deals. Over the last two years, DXPE has deployed $218.3 million in acquisitions while reducing borrowing costs by over 150 basis points. That’s disciplined capital allocation.
Capex should moderate in 2026 after jumping from $25.1 million in 2024 to $40.3 million in 2025. That should help free cash flow conversion improve from the 24.7% of EBITDA seen in 2025 back toward the 40% range seen in prior years.
The ROIC picture is also worth noting. It came in at 38.2% for 2025, roughly flat to 2024’s.
For context, in 2021 it was 21.5%. That improvement reflects the compounding effect of accretive acquisitions and margin expansion over four years.
Water and wastewater remains the clearest growth driver. The DXP Water backlog keeps growing; management called it out specifically as a continued strength heading into 2026.
Valuation Revision: $156 → $210
I’m raising my fair value estimate from $156 to $210 per share.
The method is the same as the original thesis: a sum-of-parts valuation, where I value each segment separately and add them up. Think of it like valuing three different businesses that happen to share a roof.
Two things drove the revision: a higher EBITDA base across all three segments, offset by a lower terminal growth assumption for SCS and a higher net debt position.
When I built the original model in Feb 2025, I was working from 2024 actuals and my own growth projections. DXPE has since printed a full year of results that came in ahead of those projections.
SCS declined 1.4% in 2025; it also declined in Q3. Management is optimistic about new customer wins in 2026, but this segment has underperformed consistently. I’ve reduced the terminal growth rate for SCS to 1.0%, reflecting that more modest reality.
Putting it together:
Portfolio Update
As it has been a common theme this year, we closed the week outperforming the S&P 500, widening the gap.
Portfolio Return
Month-to-date: +6.9% vs. the S&P 500’s -0.9%.
Year-to-date: +12.9% vs. the S&P 500’s -0.5%. That is a gap of 1,343 points.
Since inception: +59.4% vs. the S&P 500’s +19.6%. That’s 3.0x the market.
Contribution by Sector
Gold led the gains partially offset by industrials and tech.
Contribution by Position
(For the full breakdown plus commentary on earnings results and the big movers, see Weekly Stock Performance Tracker)
+8 bps TSM 0.00%↑ (Thesis)
+4 bps KINS 0.00%↑ (Thesis)
+2 bps LRN 0.00%↑ (Thesis)
flat OPFI 0.00%↑ (Thesis)
-8 bps STRL 0.00%↑ (Thesis)
-20 bps POWL 0.00%↑ (Thesis)
-27 bps DXPE 0.00%↑ (Thesis)
+50 bps CLS 0.00%↑ (TSX: CLS) (Thesis)
That’s it for this week.
Stay calm. Stay focused. And remember to stay sharp, fellow Sharks!
Further Sunday reading to help your investment process: