Is Amazon Bullying Itself? Industrial Supply Gambit Could Easily Backfire

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In a battle of $200-plus stocks, Amazon.com's ( AMZN ) plan, announced late last month, to become a bigger player in industrial/commercial parts supply, knocked a few points off industrial supply specialist W.W. Grainger ( GWW ). Few companies can have a greater announcement effect on the stock market than Amazon when it reveals new territory to conquer.

The question, though, is whether the news about "AmazonSupply," which has not been described in detail by Amazon management, should be more troubling to Amazon's shareholders than to Grainger's. Amazon has certainly demonstrated its disruptive capabilities - witness the wreckage in the book business, which it now dominates. But turning that dominance into profits has been more difficult.

GWW data by YCharts


It's no surprise that Amazon wants a bigger footprint in industrial supply. This year's resurgence of American manufacturing reflects smarter supply chain management by companies large and small. Grainger, the largest North American broad line supplier of maintenance, repair and operating products to commerce and industry, with 2011 sales of $8.1 billion, has been a major beneficiary of the rebound.

GWW Revenues TTM data by YCharts

In Amazon's first-quarter earnings conference call, CFO Thomas Szkutak said AmazonSupply for the moment represents simply posting a "separate URL" as a new web site on an existing on-line buying service for Amazon's business customers, who include its own suppliers and third-party vendors.

Price, terms and delivery are a game Amazon knows how to play. A single Kreg brand right-angle C-clamp listed on Grainger's web site at $49.45 lists on Amazon at $27.99. Amazon offers a co-branded revolving credit line to corporate customers in partnership with General Electric's ( GE ) GE Capital Bank. Grainger offers standard 30-day payment terms.

But Amazon's heavy investments in new capacity and new ideas have been costly to its shareholders. The market continues to reward Amazon for revenue growth, even as its profit margins have narrowed significantly. The company's first-quarter results suggested the profit margin problem is being addressed. But investors have seen better performance from Grainger.

GWW Profit Margin data by YCharts

Comparing the earnings yield of the two companies shows the greater rewards to Grainger shareholders. Grainger has increased its quarterly dividend in each of the last 41 years, including a 21% increase announced last week. Amazon has yet to join the ranks of household-name tech companies paying a dividend.

GWW Earnings Yield data by YCharts

Taking on mature companies like Grainger in the business-to-business supply market might someday be a wise addition to the Amazon empirical design. Grainger's share price, with a PE ratio of 22, is rich for an industry supply company. But waiting for Grainger's price to become more reasonable sounds like a better strategy than waiting for Amazon's profit margins to hit a more reasonable stride.

Bill Barnhart is an editor for the YCharts Pro Investor Service which includes professional stock charts , stock ratings and portfolio strategies .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: investing , Stocks

Referenced Stocks: AMZN , GE , GWW

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