The Case for Grainger: Why GWW Might Be Your Next Big Investment

, Long Tall Investing

In the bustling world of industrial B2B, there’s a quiet giant steadily chugging along, supplying the grease that keeps things running: W.W. Grainger (GWW). But is this industrial distributor worth a closer look for your portfolio? Let’s delve into the numbers and see why GWW might be your next big investment.

A Titan of MRO: Grainger reigns supreme in the Maintenance, Repair, and Operations (MRO) market, boasting a massive catalog of over 1.7 million products across various categories like tools, safety equipment, and industrial supplies. This translates to a 7% market share in the global MRO market, giving them a commanding presence across diverse industries like manufacturing, construction, and government.

Growth Engine Humming: While not a flashy tech startup, Grainger’s growth story is impressive. Over the past five years, they’ve delivered a compound annual growth rate (CAGR) of 10.4% in revenue and a 17.2% CAGR in adjusted earnings per share (EPS). Analysts are optimistic, projecting 2023 EPS growth of 22.6%, further fueling the fire.

Cash Flow King: Grainger isn’t just growing, it’s minting money. The company boasts a free cash flow margin of over 20%, meaning they turn a significant portion of their revenue into pure profit. This cash flow war chest allows them to invest in future growth, acquire strategic assets, and reward shareholders with a healthy dividend. Speaking of dividends, GWW is a Dividend King, having increased its payouts for 65 consecutive years, a testament to its financial stability and commitment to shareholder returns.

Resilient Through Turbulence: While broader markets can be a rollercoaster, Grainger enjoys a certain level of insulation. Their products are essential for businesses to keep operating, making them less susceptible to economic downturns. During the 2008 financial crisis, while the S&P 500 plummeted 37%, Grainger’s stock price dipped a mere 13%.

Valuation: Not Out of Reach: Despite its strong performance, GWW currently trades at a price-to-earnings (P/E) ratio of around 23, which is below its historical average and in line with the broader industrial sector. This suggests that the stock isn’t unreasonably expensive, offering potential for value appreciation while reaping the benefits of its growth and dividend.

Of course, no investment is without risks. Grainger faces competition from other distributors, including Amazon Business, and rising inflation could squeeze margins. Additionally, their heavy reliance on North America exposes them to potential economic headwinds in the region.

Overall, W.W. Grainger presents a compelling case for long-term investors. Its diverse product portfolio, solid growth trajectory, impressive cash flow generation, and strong dividend track record make it a reliable performer in a volatile market. While not without risks, its current valuation suggests potential for attractive returns, making GWW a stock worth serious consideration.

Remember, this is not financial advice. Always conduct your own research and consult with a financial advisor before making any investment decisions.