Inside Wall Street: Grainger's Global Supply Business Is Delivering for Investors

Gene Marcial's Inside Wall StreetW.W. Grainger is one of the few companies that's almost everywhere in the world: It distributes some 300,000 products to 2 million customers globally including oil and environmental protection companies.

As the world's largest distributor of industrial and commercial supplies to major corporations, Grainger (GWW) has been one of the companies that got a big boost from the disastrous oil spill in the Gulf of Mexico because demand for its cleanup products soared. It posted strong second-quarter results that were helped by the big leap in sales in the Gulf.

"The oil spill was a bonanza for Grainger," says Ed Walczak, chief of investments at Vontobel USA, because many of its products -- including pumps, tools, industrial gloves, safety and electrical gear -- suddenly were in great demand from both government and commercial contractors that participated in the massive cleanup.

Speedy Worldwide Deliveries

With its vast worldwide distribution network, the 83-year old company isn't only a reliable global source of important supplies but "an attractive investment play for investors on the incipient global economic recovery," says Walczak. He purchased shares after meeting with Grainger executives at its headquarters in Lake Forest, Ill., in mid-September. He came away impressed with the company's "precision in its delivery system and efficiency of its operations." He says Grainger delivers its products to many parts of the world in two to three days, when needed.

The essence of Grainger's business is providing many of the essential supplies to small and large companies around the world, including local neighborhood landscaping companies, with the goods they need. In effect, it eliminates customers' worries about warehousing a lot of inventory, notes Walczak. The high demand for its products has been so stable that Grainger's sales have grown at an annual rate of about 15%, generating an impressive yearly return on investment capital of 25% and return on equity of 20%,

So, it isn't surprising that shares of Grainger have been a steady winner, climbing from a low of $58 early last year to $120.74 on Sept. 24. That's probably why none of the 18 analysts who follow the stock recommends selling it. The analysts are evenly split in their ratings, with nine recommending a buy, and nine others rating it a hold, or neutral.

A Doubling Within Five Years?

Walczak still finds the stock a cheap buy because he sees Grainger earning $6.40 a share in 2010 and $7.40 in 2012, up sharply from last year's $5.62. So how much higher could the stock go?

Walczack forecasts that in five years, the stock could double. It appears that some large institutional investors share that optimism, including Vanguard Group, which has accumulated a stake of 4.5%; BlackRock Institutional Trust, which owns 3.5%; and State Street Global Advisors, with 3%.

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Over the next 12 months, David J. Manthey, analyst at investment firm Robert W. Baird, who rates the stock a buy, sees Grainger climbing to $131. He expects continued solid earnings growth and stock performance – even in a moderate economic recovery. With just a modest 5% share currently of the more than $100 billion global market for maintenance, repair and operations supplies, Grainger still has ample room to grow, he notes. It has good access to capital, a low level of debt and generates strong free cash flow.

With its size, acquisitions and projected global geographic expansion, Grainger is expected to continue gaining market share. Standard & Poor's analyst Stewart Scharf, who rates the stock a buy, forecasts at least 8% growth in organic sales in 2010, plus a 4% gain from future acquisitions. And as impressive as the gross margins of 41.8% were in 2009, they're expected to expand further in 2010 based on stronger sales volume, according to Scharf.

What's unusual about Grainger, which has a market cap of $8.3 billion, is its stock's steady climb since 2003, sharply outperforming its larger big-cap peers during those years. "It's an extraordinary company with a solid record of performance," says Vontobel's Walczak. Grainger, he adds, deserves a place in portfolios of investors seeking stability, safety and performance.
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