W.W. Grainger Continues To Ride High As Company-Specific Strategic Initiatives Produce Results

Seven months later, and not all that much has changed for me in regards to W.W. Grainger (NYSE:GWW). The company continues to have important, differentiating growth drivers in the short term, but long-term concerns about margins and valuation. Still, that debate continues now from a higher valuation, as the shares have climbed almost 20% since my last update, beating the S&P 500, industrials in general, and specific distributors like Fastenal (FAST) and MSC Industrial (MSM).

In that last update, I thought Grainger at least had the virtue of a differentiated growth story to separate it from what I thought was an expensive overall industrial sector. With a lot of quality industrials taking a beating since then, I see that as a less compelling argument and I don’t find as much to like at this price.

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W.W. Grainger Continues To Ride High As Company-Specific Strategic Initiatives Produce Results

Grainger Executing On Margins, But The Pressures Are Increasing

Given their sensitivity to the economic cycle, it’s no great surprise that the market performance of industrial distributors like Fastenal (FAST), Grainger (GWW), and MSC Industrial (MSM) has been lackluster at best. Likewise, it makes sense that Grainger’s relatively better end-market exposure and margin performance would drive better performance than MSC, the laggard of the three.

Grainger shares don’t look expensive now, but I do still have some concerns that management may be underestimating the weakening trends underway in manufacturing end-markets and overestimating the ability of its internal programs to drive above-market growth. I think investors will have at least one more chance to buy Grainger shares at a better price in the second half of 2019, but the shares do look relatively attractive compared to Fastenal and MSC at this point.

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Grainger Executing On Margins, But The Pressures Are Increasing

MSC Industrial Still Looks A Little Underwhelming

Patience hasn't proved all that rewarding with MSC Industrial (MSM), as the shares have not only lagged peers like Grainger (GWW) and Fastenal (FAST) and suppliers like Kennametal (KMT) but are basically flat for the past year. The debate continues as to whether MSC Industrial's issues are predominantly driven by cyclical factors, or whether increased online competition and the expansion of Amazon (AMZN) into industrial distribution has permanently altered price transparency and the competitive balance.

I admit that I find it troubling that MSC reported only mid-single-digit organic growth despite Gardner's Metalworking Index hitting its highest level in seven years. A return to positive pricing was nice to see, as was the operating leverage, but this remains a "show me" story where valuation is not all that compelling.

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MSC Industrial Still Looks A Little Underwhelming

Better Late Than Never For MSC Industrial

One of the recent concerns about industrial maintenance, repair, and overhaul (or MRO) supply distributor MSC Industrial (NYSE:MSM) was why this leading distributor of metalworking tools (among other MRO supplies) was not seeing more benefit from the emerging industrial recovery in North America. Those concerns should ease a bit with the strong daily sales reported for the fiscal fourth quarter, but the company's long-term margin leverage remains a key question, and increased competition from Amazon (NASDAQ:AMZN) and now Berkshire Hathaway (NYSE:BRK.A) shouldn't be ignored.

I've owned MSC Industrial for some time, and I've written many times that when there's a conflict between "good company" and "good valuation", I go with the former. That said, there are legitimate arguments as to whether MSC is as good of a company as it used to be and whether today's valuation already captures a lot of what can go right for the business. Although I'm not rushing for the door, and there aren't a lot of clear bargains in the industrial space, it's hard for me to make a buy-case on the stock beyond a play on improving trends (momentum) in metalworking and related industries and at least a few more beat-and-raise quarters.

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Better Late Than Never For MSC Industrial

Seeking Alpha: From Bad To Worse For MSC Industrial's Core Markets

I had my concerns about MSC Industrial (NYSE:MSM) back in the summer, as I was worried that ongoing weakness in U.S. manufacturing would make it harder for the company to achieve its margin leverage goals and grow revenue. That's proven to be the case, with monthly sales having turned negative and the shares losing another 22% or so in value from that last article.

I still believe that MSC Industrial is a good house in an increasingly sketchy neighborhood, and that's a tricky set-up for investors. Investors looking for more short-term punch (and/or who can't stand seeing near-term losses) should avoid these shares until there are real signs of strength in durable goods orders, ISM's purchasing managers' index, and other manufacturing metrics. More patient value-oriented investors may want to take a closer look, though, as there could be meaningful margin leverage and share gains pushing results (and the share price) higher over the long term.

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From Bad To Worse For MSC Industrial's Core Markets

Investopedia: Fastenal's Valuation Leaves No Room For A Slowdown

Make no mistake - Fastenal (Nasdaq:FAST) is a great company, and a good play on the consolidation of the industrial supply market. That said, Fastenal's stock carries a valuation more commonly seen in hot technology stocks than in the industrial sector. Consequently, while I do believe Fastenal has a runway to becoming one of the largest players in a market worth over $150 billion, the stock already seems to be assuming a great future.

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Seeking Alpha: Hurco Navigating A Tough Market Reasonably Well

As a tiny industrial company focused around capital equipment and generating more than half of its revenue from Europe, it shouldn't surprise anyone that Hurco (HURC) is seeing some challenging operating conditions. That said, the company is managing this tough market reasonably well and while the next couple of quarters are likely to be touch-and-go, the long-term potential of this company ought to make it a solid candidate for small-cap investors.

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Hurco Navigating A Tough Market Reasonably Well

Investopedia: A Hot Domestic Market Continues To Propel Lincoln Electric

Certain stocks torment investors with excellent performance and valuations that just never seem to get quite low enough. Welding equipment and consumables manufacturer Lincoln Electric (Nasdaq:LECO) is one such company. While I would argue that this is one of the best industrials that most people don't know about, the stock seldom trades at a bargain. Although strong sales in North America are fueling excellent growth today, perhaps fears of emerging market slowdowns will take a little steam out of the stock.

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Seeking Alpha: Fastenal Amazing In At Least 2 Respects

Arguing with the market may be a great way to get rich slowly, but it can also be an excellent way to get poor quickly. Fastenal's (FAST) valuation left the surly bonds of reality a while ago, but shorting the stock would have been quite painful until about the past two weeks. While Fastenal's model seems poised to continue delivering growth highly leveraged to manufacturing sector expansion, valuation makes this more of an economic momentum play than a rationally-valued security.

First Quarter Results - Good, Apart From A Worrisome "But"
For the most part, Fastenal delivered a very solid performance in the first quarter. Relative to other industrial suppliers like Grainger (GWW) and MSC Industrial (MSM), Fastenal continues to be the growth story and revenue jumped 20%
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Fastenal Amazing In At Least 2 Respects

Seeking Alpha: MSC Industrial's Valuation Leaves No Room For Error

By any reasonable standards, MSC Industrial (MSM) had a fine quarter. Unfortunately, valuation and expectations have climbed to a level where the standards aren't necessarily reasonable, and shareholders may have to buckle up and prepare for more volatile performance in the stock.

Growth Continues, But Where's The Leverage?
The manufacturing sector of the U.S. economy continues to rebound and grow, and that's showing up in MSC's revenue. Revenue grew more than 16% this quarter and the company continues to post double-digit organic growth as well. While non-manufacturing sales picked up (up 9% this quarter versus 4% growth in the last quarter), manufacturing growth also remained strong at more than 19%. Website sales grew 26% this quarter and now make up about one-third of sales.

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MSC Industrial's Valuation Leaves No Room For Error

Seeking Alpha: Fastenal Offers Remakrable Growth

Recent developments in the industrial distribution space haven't exactly dispelled the cliché that Grainger (GWW) is the dependable leader, MSC Industrial (MSM) the balanced growth story, and Fastenal (FAST) the real growth dynamo of this triad. Although Fastenal did indeed post solid results in the fourth quarter, investors may want to ask if it makes sense to pay so much for a levered growth play on U.S. industrial activity.

A Solid Fourth Quarter
Analysts expected quite a lot from Fastenal in the fourth quarter, and the company largely delivered. Revenue rose almost 22%, as the company saw excellent growth throughout the fourth quarter. Monthly sales rose 21% in December (on top of a nearly 21% jump in the prior year) and stores open more than two years saw roughly 18% same-store sales growth in the quarter.

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Fastenal Offers Remarkable Growth, But At A High Price

Seeking Alpha: Hurco Delivers A Good Q4, But Europe's A Worry

Machine tool manufacturer Hurco (NASDAQ: HURC) continued to ride the wave of improving conditions in the global industrial economy during the fourth quarter. While the company still looks undervalued on the basis of its long-term prospects, investors in this under-followed capital equipment company may well worry about the order situation. If 2012 does see Europe tip over into recession, the timeline for Hurco to realize its potential will get that much longer.

Solid Results Across The Board
Hurco reported that its fourth-quarter revenue jumped 40% - topping the lone analyst estimate by about 8%. North America continues to be the growth leader, with sales up 60% this quarter on a 38% increase in unit shipments. Europe remains the largest part of its business, with sales up 39% and units up 18%. Asia-Pacific was disappointing this quarter, as revenue fell 4% on a 6% decline in volume.

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Hurco Delivers A Good Q4 But Europe's A Worry

Seeking Alpha: A Supposedly Weak Economy Isn't Holding MSC Industrial Back

There are certainly plenty of valid economic indicators that say conditions today are not strong – whether its high unemployment, stagnant wage growth, poor housing prices, or low interest rates. At the same time, it's not all bleak. Plenty of industrial companies have continued to post robust earnings and indicators like ISM and rail traffic have been modestly positive. It's interesting, then, is that an industrial supply company like MSC Industrial Direct (NYSE: MSM) is enjoying some of the best operating performance of its corporate history against a such a mixed backdrop.

A Solid Start To The Year
MSC Industrial posted first-quarter results that met the midpoint on revenue, but showed a little bit extra on the bottom line. Revenue grew more than 15% this quarter, with a recent acquisition chipping in about 2.5% growth (meaning organic growth was just under 13%). Sales to manufacturing customers were even stronger, growing almost 20% and making up nearly three-quarters of sales. Sales growth to non-manufacturing customers was less impressive, up just about 4%, as expected declines in sales to government buyers weighed on results.

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A Supposedly Soft Economy Isn't Holding MSC Industrial Back

Seeking Alpha: MSC Industrial - Good Growth, Great Returns, And Rich Valuation

Sooner or later, every investor will find a company that challenges his or her beliefs on the proper trade-off between quality and value. For me, that company is MSC Industrial Direct (NYSE: MSM). This industrial supply company has posted excellent growth over the past decade and boasts full-cycle returns that many far larger companies in less cyclical businesses never approach. While this company has ample potential to grow its footprint and top line, as well as expand those margins even further, today's valuation seems already predicated on those assumptions.

Carving A Niche In A Huge Market
Figuring out MSC Industrial's market potential is no easy task; my first job on the Street was with an analyst team that covered this company and that was a constant struggle. A good estimate, though, is probably in the $140 billion neighborhood – suggesting that MSC has less than 2% share.

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MSC Industrial - Good Growth, Great Returns And Rich Valuation

Seeking Alpha: Tiny Hurco Looks For A Big Recovery

The global recovery has been largely unimpressive and uneven, with stubborn unemployment in the U.S., sovereign debt and bank capital worries in Europe, and inflation worries in many of the fast-growing emerging markets. That has led to an uneven recovery in tiny machine tool company Hurco (HURC). Although Hurco has been punished along with most industrial concerns this year and there are definitely reasons to worry about the company's large European exposure, value-oriented investors interested in “companies that make stuff” should definitely consider this name as a 2012 recovery idea.

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Tiny Hurco Looks For A Big Recovery

Investopedia: Novemeber's Rail Data Supports A Strong Economy

There is a great quote from the sci-fi series "Babylon 5" that says, "understanding is a three-edged word; your side, my side and the truth in between." That seems particularly relevant when looking at the discrepancy between what rail and industrial sales data says about the economy and what the market is saying about the near-term outlook for the broader U.S. economy. Not only is rail data showing solid momentum, but there is ample room still left to grow, before the stats have to carve out new highs. (For related reading, see A Primer On The Railroad Sector.)


November Rail Data 
Once again the Association of American Railroads' Rail Time Indicators has shown encouraging and positive news on the underlying state of the U.S. economy. Rail traffic, which is measured in carloads, rose 2.3% in November from the year-ago level and 0.9% from October. Of the reporting categories, 13 were positive, which is equal to last year and up one from the month of October.


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Investopedia: Industrial Slowdown? Not At Fastenal

If the economy really is teetering into a recession again, it is despite relatively encouraging rail traffic numbers and fairly strong sales trends at industrial suppliers. While Fastenal (Nasdaq:FAST) is unquestionably tied to trends in GDP and industrial activity, investors who overlook the consolidation and market share growth potential of this name do so at their own risk.

Earnings Still Growing at a Fast Pace  
Fastenal has more than one wind at its back, and the company has translated this into very solid growth during this economic recovery. For the third quarter, revenue grew 20% and slightly exceeded analyst expectations - a performance all the more impressive as the company routinely reports monthly sales figures. That said, there was some growth deceleration in September (growth was below 19% year on year), so investors should assume that analysts on the wrong side of this story will try to use that tidbit to validate continued pessimism.

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http://stocks.investopedia.com/stock-analysis/2011/Industrial-Slowdown-Not-At-Fastenal-FAST-GWW-HD-WCC-AXE-HWCC-DXPE1017.aspx

Investopedia: Fastenal Not Slowing Down Yet

There is ample fodder for a dour outlook on the U.S. economy. Politicians in Washington, D.C. continue to play chicken with the budget. Debt discussions, economic statistics like employment, wage growth and ISM are not terribly encouraging, and indicators like rail traffic look sluggish.


Nevertheless, plenty of companies with strong correlations to the health of manufacturing are still performing well. Growth at industrial supplier Grainger (NYSE:GWW) has slowed but is still pretty solid, while other industrial input companies like Lincoln Electric (Nasdaq:LECO) and Praxair (NYSE:PX) have strong stocks and good earnings estimate momentum.

With that backdrop, then, it is perhaps not so surprising that Fastenal (Nasdaq:FAST) reported solid top-line growth for the second quarter. Though it was not a perfectly clean quarter and the stock is quite expensive, Fastenal's results suggest underlying business activity is not so terrible. (For related reading, see Profit By Understanding Fundamental Trends.)


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Investopedia: Industrial Softness Spreading Out

There have been some concerning signs recently that the economic recovery is petering out. Railroad traffic is softening and industrial supply giant Grainger (NYSE:GWW) has been reporting decelerating growth in its U.S. orders. With recent data points from leading mini-mills and a major European industrial company, it looks as though the second quarter saw a definite slowdown, and growth for the rest of the year is up in the air. 

Spotty Demand for Steel? 

Last week saw earnings preannouncements from both Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD). Nucor was relatively upbeat in the text of its release, talking about how prices for finished steel have caught up with rising material costs. That said, things have not improved enough - the midpoint of Nucor's guidance was about 10 cents (or 12%) lower than the prior average analyst estimate.

The report from Steel Dynamics was less rosy (and more detailed). Steel Dynamics has seen lower recycling profits as the cost of scrap copper and steel have risen. Worse yet, steel orders were down 25% in April before starting to improve in May.

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http://stocks.investopedia.com/stock-analysis/2011/Industrial-Softness-Spreading-Out-NUE-STLD-GWW-F-LECO-ITW-PX0621.aspx

Investopedia: Rail Traffic Confirms A Slowing Economy

With a sour stock market since May, it seems like investors have already placed their bets on a slower economy. Now it increasingly looks like the data is validating that position. Payroll figures from Automatic Data Processing (NYSE:ADP) are pointing to an iffy job market, banks like Wells Fargo (NYSE:WFC) aren't upping their loans (and are struggling to get rid of bank-owned houses), metrics like the PMI have weakened, and now rail traffic has slowed. 


The May edition of Rail Time Indicators from the Association of American Railroads shows that carload traffic in the U.S. grew just 0.5% on a year-over-year basis and was flat with April's traffic level. Intermodal is still quite strong (up 7.5% annually and almost 1% sequentially) and came very close to setting a new record.

 Depth and Breadth a Concern
During the fat months of the traffic rebound, it was common to see every (or nearly every) rail category growing. Now that has thinned down to a point where fewer than half of the categories are growing. So while it is true that carloads ex-coal were up over 2% and ex-coal and grain were up 0.4%, the strength of the recovery has tapered off significantly. 



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