Being in the right place at the right time can be rewarding,
especially when it comes toinvesting .
Being in the rightasset class , the right country or even the
right sector when they are in favor can pay off big time and
boost your portfolio's returns. It's difficult to time themarket
, so I look for industry leaders that reward shareholdersyear
One of the sectors that can give investors trouble is the
industrial sector, which often lives and dies by the overall
health of the globaleconomy . When times are good, manufacturing
takes off, but when things slow down, the sector can experience
difficult times. Just ask shareholders of companies such as
Precision Castparts (
who have seen a roller-coaster ride during the past five years.
For another example, take a look at the
Vanguard Industrials Exchange-TradedFund (
One of the ways I like to play this volatile sector is through
industrial distributors. The industrial distribution industry is
highly fragmented, with the top 50 distributors representing
about 30% of the roughly $140 billion North American market.
In this highly competitive field, one company in particular is
worth a closer look. This company is growing at a 10% rate and is
poised to generate impressive returns for the foreseeable future.
It has also raised itsdividend 41 straight years,offering a great
blend of growth andincome with less volatility than moststocks in
the industrial sector.
W.W. Grainger (
has been an industrial distributor of maintenance, repair and
operations supplies for businesses and institutions primarily in
the U.S. and Canada. Grainger helps more than 2 million
businesses in 157 countries by providing the right products to
keep their facilities up and running. The company works with more
than 3,500 suppliers to provide customers access to more than 1
million products, from adhesives and fasteners to hand tools and
Through increasing its product offerings and scale, Grainger has
been able tooffset costinflation by expanding its gross margins
from 32% in 2002 to 43.8% in 2012. The company can boast 17%
returns on investedcapital for the past 15 years, while many of
its competitors have been in single digits. Because Grainger is
the largest customer for seven of its 10 largest suppliers,
margins should continue to expand.
One of the ways Grainger has been able to stand out is by
aggregating demand on a national level. This enables
manufacturers to operate closer to optimal utilization levels and
minimizeinventory risk. Manufacturers prefer partners like
Grainger because they perform the selling functions for suppliers
which then have to spend less on marketing andsales . Grainger
also has a competitive advantage by upselling its services beyond
At its current pace, Grainger could go from the $9 billion
inrevenue it posted last year to $18 billion by 2022. With an
annual growth rate in excess of 10%, Grainger should be able to
boost its North American sales and also expand internationally.
Take a look at Grainger since 2009:
Grainger is in solid financial shape with more than $486
million incash and modestleverage at a 15% debt-to-capital ratio.
It recently reported recordearnings per share of $2.94 for its
2013 first quarter. Operating margins increased 1.2 percentage
points to 15.1%, its highest quarterly level since 2006.
Management forecasts 2013 sales growth of 5% to 9%, with earnings
per share between $11.30 to $12.
Risks to consider:
Industrial distributors have not been able togain much of a
foothold inemerging markets . Although Grainger has a presence in
places such as India and China, its international growth has not
been impressive. If manufacturers move more production overseas,
this could impair Grainger's profitability. Additionally, about
70% of Grainger's salesvolume is shipped to customers based on a
requisition order, not in-store purchases. This allows its
customers to comparison-shop and limits Grainger's ability to
Action to take -->
Grainger is a good buy at up to $255 a share. It pays a
1.5%dividend yield , which amounts to about $3.20 a share, and
has raised its dividend every year since 1972. My target sell
price is $325, representing 35%upside during the next 12 to 18