DXPE Q3 Deep Dive: Revenue Growth and Margin Pressures Shape Mixed Quarter

Industrial distributor DXP Enterprises (NASDAQ:DXPE) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 8.6% year on year to $513.7 million. Its non-GAAP profit of $1.34 per share was 14.4% below analysts’ consensus estimates.

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StockStory’s Take

DXP’s third quarter was marked by strong sales growth, yet the market responded negatively due to profit shortfalls. Management cited robust end-market demand in segments like Innovative Pumping Solutions and Service Centers, with the water business contributing a larger share of revenue. CEO David Little noted that "our execution has resulted in both organic and acquisition-driven growth," but acknowledged that expenses rose more than expected due to increased investments in people, technology, and acquisition activities. Operating margins held steady, yet elevated spending weighed on non-GAAP earnings per share.

Management’s outlook centers on continued top-line momentum, supported by a healthy acquisition pipeline and ongoing expansion in water and wastewater projects. CFO Kent Yee emphasized that "11% EBITDA margins are sustainable for now," but signaled some caution around seasonal softness and elevated SG&A expenses in the coming quarter. The company is investing in operational capabilities and targeting new verticals, such as data centers, though these opportunities are still in early stages. Leadership remains focused on balancing growth investments with operational efficiency as they enter the next year.

Key Insights from Management’s Remarks

Management attributed the quarter’s mixed performance to strong organic and acquisition-driven sales, offset by higher operating expenses and margin pressures.

• Service Centers drive resilience: The Service Centers segment continued to deliver consistent year-over-year growth, leveraging a diverse product and service portfolio across multiple regions and end-markets. Management highlighted robust demand in air compressors, metalworking, and safety services, contributing to stable gross margins.
• Innovative Pumping Solutions momentum: Sales in the Innovative Pumping Solutions business increased, with the DXP Water platform now representing a majority of segment sales. This shift toward water and wastewater projects has improved overall margins within the segment, and energy-related backlog remains above historical averages.
• Acquisitions support growth: Recent acquisitions contributed to both revenue and margin expansion, with $18.4 million in sales from companies acquired within the past year. Management views the acquisition pipeline as active and expects further deals to close by early next year.
• Supply Chain Services softness: The Supply Chain Services segment faced a decline due to pullbacks in oil and gas and chemical sector spending. Leadership cited seasonality and customer facility closures as factors impacting performance but expects demand to recover in early 2026.
• Rising operating expenses: Elevated spending in SG&A was driven by merit raises, increased insurance premiums, technology investments, and professional fees from acquisition activity. Management noted that some of these costs, such as insurance and claims, may persist but are necessary to support long-term growth.

Drivers of Future Performance

Looking ahead, DXP expects continued revenue growth from acquisitions and water projects, while closely managing margin headwinds from operating expenses and seasonality.

• Acquisition-led expansion: Management aims to close additional acquisitions in the coming quarters, particularly in water-related markets, which are expected to further diversify revenue streams and enhance margin profiles. The company anticipates that these acquisitions will continue to be accretive to both gross and operating margins.
• Margin management focus: Leadership targets maintaining 11% adjusted EBITDA margins, but acknowledges that seasonal factors and elevated SG&A costs, such as insurance and technology investments, could create temporary margin pressure in the next quarter. Operational efficiency improvements remain a priority to offset these headwinds.
• New market opportunities: The company is actively pursuing opportunities in emerging end-markets, including data centers, by leveraging its expertise in pumps, filtration, and power products. While current exposure is limited, management views this as a significant long-term growth opportunity if the company can build credibility and secure more projects.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be monitoring (1) the pace and integration of new acquisitions, especially in water and wastewater markets, (2) margin trends as the company navigates higher SG&A and seasonal headwinds, and (3) progress in expanding into new verticals like data centers. Additionally, we will watch for signs of recovery in the Supply Chain Services segment and whether operational efficiency initiatives can sustain profitability.

DXP currently trades at $101.02, down from $122.24 just before the earnings. Is there an opportunity in the stock?Find out in our full research report (it’s free for active Edge members).

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