Company Reports

We increased our fair value estimate for Grainger by 3% to $570 per share, up from $550 previously. Management maintained guidance, which implies volume growth for the US maintenance, repair, and operations, or MRO, industry will be flat to slightly up in 2024. Last quarter, management commented that pricing growth will likely be between 0%-1% this year.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $16 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its US branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the US to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $16 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its US branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the US to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

We increased our fair value estimate 6% to $550 (up from $520 previously). Grainger’s 2024 guidance came in above our expectations, leading us to adjust our near-term sales and margin expectations higher.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $16 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

Our fair value estimate increased by 9% to $520 per share, following third-quarter earnings. We attribute 5 percentage points of the fair value increase to the time value of money since our last update, with the balance coming from upward adjustments to our long-term forecast. We also made slight tweaks to our 2023 sales and margin estimates, as management narrowed its full-year guidance. Even so, we still see shares trading at a 34% premium to our fair value estimate.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

Grainger’s second-quarter results led us to increase our fair value estimate to $476 from $473 previously. The increase was driven by slight tweaks to our near-term sales and margin forecast, in addition to the time value of money since our last update. The company’s high-touch business continues to perform well, outgrowing the U.S. maintenance, repair, and operations market by 525 basis points in the quarter. Recall, management’s outperformance target is 400-500 basis points.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

We raised our fair value estimate for Grainger to $473 ($470 previously), following first-quarter earnings. The company reported another solid quarter, thanks to strong demand. We were impressed with Grainger’s updates on the high-touch business. Management highlighted the segment outperformed market growth by approximately 750 basis points. This is roughly in line with the company’s performance in 2022 (775 basis points of outperformance). Recall, management is targeting to outgrow the market by 400-500 basis points. We expect more of the same going forward, thanks to Grainger’s strong competitive positioning compared with peers. Our narrow-moat rating is underpinned by the company’s cost advantage, which manifests from the volume rebates it receives from suppliers (lower per unit cost).

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

Grainger posted strong fourth-quarter results to close out the year. Net sales in the quarter increased 13% year on year to $3.8 billion. The company’s high-touch solutions business continues to stand out. In the quarter, the segment grew by 17%, thanks to strong price realization. Gross margins in the segment were up approximately 225 basis points to 41.8%, largely due to improved product mix and lower freight costs. While supply headwinds are still presenting a challenge, Grainger managed to keep price/cost relatively neutral in the fourth quarter.

We raised our fair value estimate slightly to $444 from $441 previously, after tweaking our near-term sales and margin expectations for Grainger. The company posted another strong quarter, growing sales to $3.9 billion, which was up 16.9% year on year. Both of Grainger’s segments posted solid growth, with high-touch solutions increasing 19.4% year on year, while endless assortment rose 8.6% year on year. The company’s results showed demand across its end markets remains solid, despite increasing uncertainty around global economic growth. This theme was also present across the other large industrial distributors that have reported this earnings cycle. Consumer-related markets are starting to slow, but industrial and manufacturing end markets are still performing quite well.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

On Sept. 21, narrow-moat-rated Grainger held its first investor day in five years. The company reaffirmed its 2022 guidance and shared its outlook for the next few years. The key takeaway was management's confidence in growing both sales and margins through 2025, despite the market’s concerns around economic growth in the near term. Grainger pointed to its encouraging conversations with customers, who are still looking to spend on MRO products.

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

Narrow-moat-rated Grainger reported another quarter of solid results, leading us to raise our fair value estimate to $415 from $390 previously. Given its position as a national distributor, Grainger has been adept at leveraging its global network of suppliers (thousands of suppliers) to secure industrial supplies, while smaller regional distributors lack the distribution network to secure supplies amid a period of major supply disruptions.