W.W. Grainger (GWW) is company founded in 1927 year and operates in MRO business (maintenance, repair and operate facilities). Revenues comes mainly from B2B segment, split of sales is presented below:

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Sales is recurring, with highest share of safety and security products – company will pay for such products regardless of economic conditions.

Company is a top player in MRO business in the world, but when we look on market share we can see that market is very fragmented and I see further potential for growth. Total share is 3% – would it be strange if market share would rise to around 6-10%? I don’t think so.

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Company is further developing e-commerce segment – in my opinion it is the only right way for traditional businesses.

Company is generating strong cash flows, which are distributed to shareholders.

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As it comes to financials (estimates):

Market cap ~ $14B

Net debt ~$1.8B

Payout ratio ~40%

Beta = 0.7

Dividend yield 2% + share buyback around 7.5% (part of it debt-funded, I assume whole $3b program to be finished)

 

Estimated valuation ratios:

EV/EBITDA = 10.8

P/E = 19.5

 

W.W. Grainger is one of The Dividend Aristocrats paying increasing dividends since 1972 year. Currently dividend yield is around 2% – generally high from historical point of view, but in January it was even as high as 2.5% – that was definitely an awesome time to buy (because dividend yield was high from historical perspective). Moreover we should add expected buyback yield of around 7.5% annually – it seems like a great opportunity.

 

Drawdown risk analysis:

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Drawdown risk shows that it might be still attractive to buy shares. It was deffinitelly in January, when after weak financial results share plunged to around $190 (drawdown comparable to weakness from 2008-2009). The only risk is valuation, which is high, but acceptable. In case of further oil weakness (lately rebounded) there might be some pressure on GWW revenues from Oil & Gas segment. I would deffinitely buy shares at around $210 and I will consider buying at current prices.

 

Summing up, GWW is expected to grow very fast (e-commerce, global growth) + DY 2% + buyback around 7.5% (!), valuation is acceptable, but the case is whether next quarters will be stronger or weakness of Oil & Gas segment which we saw in Q4 2015 will be continued…

 

Disclosure GWW – no position