Apparently, there aren't enough nuts, bolts, and screws to hold this economy together. Just last week, industrial-parts supplier Fastenal (NASDAQ:FAST) said it plans to slow down on store expansion, since there's a good possibility that the economic train will run off the rails. Today, W.W. Grainger (NYSE:GWW) reported earnings that, like Fastenal's, showed higher profits on lower sales.
Grainger said it earned $107.9 million, or $1.39 per share, compared with $104.4 million, or $1.28 per share, in the year-ago quarter. Revenue dropped 1%, to $1.59 billion.
More ominous, though, is Grainger's decision to forgo updating guidance for the immediate future. In November, the provider of facilities-maintenance products suggested that 2009 sales would land anywhere between a 5% drop and a 5% increase. However, as January has played out, Grainger now says it's performing below the low end of its estimates, and therefore will suspend offering guidance, since it can't see very far ahead.
From MSC Industrial Direct (NYSE:MSM) to Interline Brands (NYSE:IBI), the maintenance and repair-products segment continues to operate in a harsh environment. Both of the aforementioned companies were able to skate by in the latest quarter with modest results. Analysts expect WESCO International (NYSE:WCC) to follow their lead, posting only incremental sales growth when it reports earnings later this week. But like its rivals, WESCO's prospects going forward are dim.
As I noted when I wrote that Fastenal seemed to be going nowhere fast, analysts at Morgan Stanley are expecting the industrial economy to contract by 3.5% in 2009. To counter such a decline, Grainger has undertaken extensive plans in China. The company intends to establish a second distribution center there this year, even while China lurches toward recession as well.
Grainger's success to date has hinged upon its size and reach. It lands at No. 4 on Industrial Distribution's list of 50 biggest distributors, with an integrated network of 600 branches, 18 distribution centers, and 2008 sales of $6.9 billion. That kind of muscle should allow W.W. Grainger to survive the current malaise. Moreover, with Grainger at a $5.5 billion market cap, you're paying just 13 times earnings for any future growth. Top rivals such as Fastenal, MSC, or even Watsco (NYSE:WSO) sell for 15 to 18 times forward earnings.
Even though the supplier of industrial parts and services may not be able to see very far into the future, investors with a longer time horizon might do themselves no harm by bolting Grainger into their portfolios.
