Both of these companies operate in a segment of the retail industry that has been least touched by the shift to ecommerce -- industrial equipment. However, with Amazon Business lurking in the wings, each of these companies will need to adjust.
W.W. Grainger (GWW, Financial) has already begun doing so, building the 10th-largest e-commerce site in North America, helping it generate over $10.6 billion in sales during the last 12 months. Fastenal is pinning its future growth on vending, onsite locations and national accounts, as well as services that support infrastructure, namely logistics, distribution and information technology.
Both could be in a position to see major growth since the company’s combined top line numbers represent less than 5% of the global market share. Or, maybe that’s what Amazon recognizes too.
These companies don’t have the sexiest stories
Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Today, the company serves 400,000 active customers through approximately 2,400 stores and 14 distribution centers, and over 70,000 vending machines. Fasteners (e.g., bolts, screws, nuts, washers, sockets) remain the largest category, generating about 37% of sales.
W.W. Grainger is quite a bit older, founded in 1927 in Chicago and publicly traded since 1967. It has increased its dividend payment to shareholders for 45 consecutive years. The company serves more than 3 million customers through online and catalog purchasing platforms, vending machines (too), and a network of 500 branches worldwide; however, Grainger gets over 75% of its revenue at home in the U.S.
W.W. Grainger (GWW, Financial)
Revenue: $10.6 billion
Margins: 39.2 (gross)
Income: $643 million
EPS/Div: 11.16 / 5.12
Book Value: 31.61
Stock Price: $305.28 (close on July 10)
Grainger has suffered through a few years of soft results, which led it to cut prices on thousands of SKUs in order to defend its position in the market. Crude oil price increases have helped boost sales of Grainger’s operating and maintenance supplies for the energy sector.
Profit is also on the rise, with analysts looking for $13 to $14 per share in 2018. That puts the forward price multiple around 21x. The trade war with Canada won’t help matters, as Grainger’s operations north of the border produced a $9 million loss in the last quarter, forcing the company to close dozens of stores across the country.
Grainger is expected to grow at 12% a year over the next three to five years, and barring any market corrections, that would put its earnings per share in the $20 range. Even though it seems almost every stock is overpriced, at more than $300 a share, W.W. Grainger just isn’t growing fast enough to warrant an investment. Nonetheless, it does have a very durable business model and could also see wins in self-service with 65,000 installed vending machines.
Fastenal Co. (FAST, Financial)
Revenue: $4.5 billion
Margins: 49.1 (gross)
Income: $619 million
EPS/Div: 2.16 / 1.33
Book Value: 7.55
Stock Price: %49.53 (close on July 10)
In the latest quarter, Fastenal posted earnings per share of 61 cents with the top and bottom line numbers rising 13% and 33%, respectively.
The results were driven by improved demand for non-fastener products through its Industrial Vending and Onsite segments. Fastenal has over 678 onsite locations and more than 70,000 vending machines that collectively generate north of $2 billion, $1 billion and $900 million, respectively, in annual sales across the two segments. These machines help manufacturers and other industrial companies skip the ordering all together and get supplies on demand in their own facilities.
Fastenal’s scale has allowed it to earn return on investment capital above 20% for over two decades, and it’s likely going to continue. Now, with a much lower corporate tax rate, Fastenal should book more profit to the bottom line.Â
By The Numbers
One number that may be a hinderance to investors is the current share price. Grainger is the larger of the two by sales volume and market capitalization and generates over $1 billion in cash flow. It also trades above $300 per share, which alone makes it harder mentally for some to get involved. Fastenal has better margins, higher returns on assets, equity and invested capital. It has much lower debt to income levels, and it has been growing faster than Grainger. Fastenal also pays out a higher dividend thanks to a price sitting under $50 a share.
Investors will likely make money with both companies if holding the stock long-term but with Grainger reaching new highs, it would not be wise to chase the price at this point. Fastenal, on the other hand, is trading near the middle of its 52-week range. Even though the point and figure chart looks like the stock will continue lower, Fastenal's value should outpace Grainger's value going forward.
Disclosure: I am not long any stock mentioned in this article, but may take a long position in Fastenal within the next 72 hours.
