Watch Out for Possible "Wholesale" Value Traps

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

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 (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 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 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 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 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 a pass for the time being.

Greasing the wheels of progress

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 appears to have things under control.

Investors should appreciate that Rockwell 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 applied for 33 patents.

Overall, the fact that Rockwell'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 appears to be a fairly solid investment moving forward.

Chill out for a second

Watsco (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'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'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 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.

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Chris Hodge has no position in any stocks mentioned. The Motley Fool recommends Watsco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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