What happened
Shares in industrial maintenance, repair, and operating supply company W.W.Grainger (GWW 0.55%) fell 10.8% in January according to data provided by S&P Global Market Intelligence.
The move comes in the context of a difficult month for industrial supply companies, including Fastenal (FAST 0.10%) and MSC Industrial Direct (MSM 1.11%).
Data by YCharts
There are three main, connected reasons why. First, Fastenal and MSC Industrial gave results in January (Grainger released results in early February) and their nonsafety/nonpersonal protective equipment (PPE) sales weren't enough to convince investors that they were in recovery mode just yet.
Image source: Getty Images.
Second, a rising sharing of PPE sales puts pressure on profit margin, as PPE sales tend to be lower-margin activities. Indeed, Fastenal, MSC Industrial, and Grainger all reported year-over-year margin declines in their earnings reports.
Third, raw material prices have been rising, and this could put pressure on Grainger's margins if it can't pass on price increases from its suppliers.
So what
Industrial supply companies are a key bellwether of the manufacturing sector, and as the sector recovers, so should Grainger's sales. However, it's hard to tell exactly how strong the recovery will be and whether Grainger's mix of end-market customers will expand activity in the coming quarters.
Manufacturing survey data certainly suggests a recovery is in progress, but that's as would be expected given the decline in the second quarter of 2020. For reference, a reading above 50 implies an expansion.
Data by YCharts
Now what
The key questions are what to expect going forward and whether Grainger and others can maintain margins in the face of rising raw material costs. It might take a strong recovery to create the pricing power necessary for them to do so. Time will tell.
