In this article, let's take a look at W.W. Grainger, Inc (GWW, Financial), a $16.92 billion market cap company, which is the largest global distributor of industrial and commercial supplies, such as hand tools, electric motors, light bulbs and janitorial items.
Fundamentals
The company focuses on increase its product offerings, while expanding its gross margins to more than 40% in 2013. The company is the largest industrial MRO distributor and it is expanding internationally to promising regions such as Asia and South and Central America.
The firm is increasing the number of products in order to diversify its revenue growth. Other strategies are also implemented searching for growth; this refers to acquisitions and expanding its e-commerce business.
Competitor
The company almost triples Fastenal’s revenue, with a half of store personnel than Fastenal. The focus on online sales was a great strategy to capture new costumers. Marketing actions like catalogs and online marketing have done a good job. For example, online sales represent about 30% of total sales.
Average Return
Considering the last 15 years, W.W. Grainger generated a 17% average return, and if we reduce the time frame, the return is even better. It generated adjusted ROIC in excess of its cost of capital and above the ones achieved by its peers.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 6.92% but earnings per share declined in the most recent quarter compared to the same quarter a year ago ($3.30 vs $2.95). During the past fiscal year, the company increased its bottom line. It earned $11.12 versus $9.52 in the previous year. This year, Wall Street expects an improvement in earnings ($12.28 versus $11.12).
The gross profit margin is considered rather high; it is at 45.15% and it has increased from the same quarter the previous year. The net margin is at 8.24% which is ranked higher than 91% of the 227 Companies in the Industrial Distribution industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| GWW | W.W. Grainger | 24.46 |
| AER | AerCap Holdings NV | 13.61 |
| AL | Air Lease Corp | 9.49 |
| WCC | Wesco International Inc | 14.3 |
| URI | United Rentals Inc | 27.13 |
| Industry Median | 7.09 |
The company has a current ROE of 24.46% which is higher than the industry median and the ones exhibit by AerCap (AER, Financial), Air Lease (AL, Financial) and Wesco (WCC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. For investors looking at higher ratios, United Rentals (URI, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 21.5x, trading at a premium compared to an average of 20.2x for the industry. To use another metric, its price-to-book ratio of 5.0x indicates a premium versus the industry average of 1.32x while the price-to-sales ratio of 1.7x is above the industry average of 0.56x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $27.773, which represents a 22.7% compound annual growth rate (CAGR).
The company has demonstrated a pattern of positive earnings per share growth over the past two years.
Final Comment
We think the company will improve in the future, because we believe it will continue improving its margins as well as taking actions to reduce costs. Moreover, last year, Grainger increased its quarterly dividend 16% and it was the 42nd consecutive year in which it has boosted it. Of course this is a good signal but it's just part of the process of selecting a stock.
Hedge fund gurus like Jeremy Grantham (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
