WW Grainger: A Healthy Infrastructure Buy For Any Recession-Resistant Portfolio
by David Fessler, Advisory Panelist, Investment U
Friday, October 24, 2008: Issue #876
The futures market was so bad this morning, it triggered the “limit down” rule – when futures trading is frozen. With no end in sight to the string of negative headlines, investors worldwide are calculating the impacts of a sustained global recession. But since there’s no way anyone can accurately call the bottom, all we can do now is continue to uncover sound prospects for your long-term money… whether you decide to buy today, next month or a year from now. Here’s one in particular that’s well placed to weather any storm, including today’s…
When the average weekend warrior wants nuts, bolts and other hardware for a project, it usually involves a trip down to the local Home Depot (NYSE: HD) or Lowe’s (NYSE: LOW). However, if you’re running a manufacturing business or institution, like a school or hospital – and you need to keep it running – your needs are going to be much more immediate and diverse than what the big box stores can deliver.
But without wasting a lot of time running to a plumbing, electrical or other specialty store to get something specific, what other choices are there? Let’s say you need a new winch, or steel drums, or a conveyor belt, along with items from the plumbing and electrical stores.
In that case, your choice becomes a very simple one. It’s the same one that 1.8 million other businesses rely on worldwide. Yet you’ve probably never heard of this $6 billion Fortune 500 company… I’m talking about WW Grainger, Inc.
WW Grainger – A Global Industrial Powerhouse
WW Grainger, Inc. (NYSE: GWW), is a global industrial service business powerhouse. Grainger provides the nuts and bolts – and just about everything else – from one of its more than 600 branches to over 115,000 customers every day.
And there’s no waiting: Customers can go directly to the branch to pick up their order or have it shipped directly to them.
Customers for its 870,000 products include a wide, diverse group:
- All levels of government, including offices, prisons, military installations and all U.S. postal facilities.
- Heavy manufacturers: lumber, textile, metal, chemical and rubber companies.
- Light manufacturing: pharmaceutical and biotech, food and beverage, and most of the electronics industry.
- Retail: gas stations, restaurants, grocery and most other stores and malls.
- Commercial contractors: maintenance and construction on many kinds of commercial buildings and installations.
- Commercial customers: theaters, hotel, motels, hospitals and nursing care facilities.
Although WW Grainer has its roots in Philadelphia, where it started as a motor repair shop back in 1927, it has morphed into a global industrial supply powerhouse within the infrastructure sector. In addition to its 438 branches in the United States, Grainger has 15 branches and a distribution center in Mexico. Canada is well served, too, with 153 branches and five distribution centers.
WW Grainger’s Newest Venture – China
China is WW Grainger’s newest venture, and its 128,000 square-foot distribution center supports six branches located in and around Shanghai. Clearly the potential here is enormous, and Grainger currently has over 53,000 items described in Chinese in its online catalog.
And Grainger’s business is doing great, in spite of the economic malaise sweeping down upon us. The reason? Things break, wear out or need updating, and that requires many of the products that WW Grainger’s sells.
The company recently completed its third quarter, and sales were up 11%. EPS of $1.79 handily beat analyst’s estimates of $1.53 a share. The company attributed its better-than-expected results to an expansion of its product line and greater market share.
And in spite of the slowing global economy, Grainger raised its earnings outlook for the remainder of 2008.
WW Grainger CEO James T. Ryan had this to say: “Our third-quarter and year-to-date results are a testimony to Grainger’s winning strategy and our employees’ ability to execute. Going forward, the credit crisis and its effect on the economy create uncertainty. However, our national scale and local inventory availability help customers be more efficient as they maintain their facilities during these challenging times.”
So how is Grainger able to be so successful in such a challenging economic environment?
There are three things that contribute to Grainger’s continued success:
- Immediate product availability
- Flawless execution
- Standout customer service
The company has a long-term goal to average 7% to 10% annual sales growth through a given economic cycle. This sounds impossible at best, but the company consistently grows its top line revenue at a rate much faster than the growth in GDP.
In summary, the maintenance, repair and operations markets are estimated to be around $540 billion worldwide.
Clearly Grainger has plenty of room to grow its business for the foreseeable future, and it represents a great way to add a healthy infrastructure service business to your recession-resistant portfolio.
Good investing,
Dave Fessler
Today’s Investment U Crib Sheet
- Futures are in the news this morning, but let’s take a closer look. A futures contract is an obligation to buy or sell a security at a specific price at the market open. Futures are traded in extended trading hours before and after the markets are open. They give us a good indication of which direction the market will open, but that’s it – their ability to forecast the future ends at the start of trading.
- This morning, the Dow futures dropped by 550 points. In the stock market, there are the maximum daily limits on the lowest it can fall before the exchanges will halt trading, called trading curbs, or “circuit breakers.” Follow this link for more information on trading curbs.
In the futures market, these circuit breakers are called a “limit-down.” It’s the maximum limit futures contracts can move down before being halted.
- Think of limit-downs and circuit breakers as the trailing stop for the entire stock market. We use trailing stops to limit our losses and protect our gains. When a stock pulls back 25% from its closing high, we sell it at market. This strategy ensures that you never loose more than 25% of your position.
It prevents a small loss from becoming a major one. And for investors looking to protect gains, you can raise your trailing stop as a stock price climbs. This way, if it does fall down, you don’t lose your hard-won profits.
For more on trailing stops, take a look at Investment U Issue #803, Trailing Stops: Lock In Your Profits with This Not-So-Secret Sell Strategy. - Finally, for some time-tested money management rules, including a proven strategy for dealing with markets like these, we suggest reading How To Build Wealth: Achieve Your Financial Goals in the New Millenium Using Our Four Pillars of Wealth.
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