Grainger's upgraded guidance fails to impress The Street, despite continued strong earnings

Grainger released strong second quarter figures today with 8% revenue growth and a 12% increase in net earnings. In addition Grainger raised their 2007 EPS forecast from $4.70-$4.85 to $4.75-$4.90. Grainger's failure to raise the low end of their EPS forecast caused the stock to crash 4.18% today - which I believe has created an excellent buying opportunity for a stock which should reach $115 by year end.

Grainger's press release detailed progress toward the companies market expansion - with many of the expansion cities experiencing 10-12% growth year over year. The press release also noted that Mexican sales rose 26% with U.S. sales rising 8% (5% related to market expansion efforts and 3% organic growth). 8% revenue growth domestically is impressive and points to good execution of their marketing expansion and underlying strength in the US economy. Historically Grainger's sales have been tied to the health of the U.S. economy but these results reflect the potential for Grainger to grow the business through improved branch locations, targeted advertising and greater cost control. It will be interesting to see if Grainger's numbers will be able to weather any future dips in the ISM Manufacturing Index during the next year or if their sales will continue to move in lock-step with the index.

MRO Supply Fund - A good investment?

This year publicly traded MRO supply companies are up significantly againts the S&P 500 and Dow Industrial averages. Grainger, Fastenal, MSC, and Watsco collectively are up 24.73% YTD compared to 5.94% and 7.20% for the S&P 500 and Dow Industrials respectively. Part of the reason I started this blog is because I think the MRO supply business is a great sector to invest in. I plan to periodically post updates regarding the performance of what I call the MRO Supply Fund (Grainger, Fastenal, MSC, and Watsco). I have also included a small table that tracks the return of these stocks relative to the S&P and Dow at the 1 year, 5 year, and 10 year intervals. Please let me know if you think I should include others companies to the MRO Supply Fund.

	YTD	1 Year	5 Years	10 Years	10,000 Investment after 10 years
GWW	31.46%	29.10%	91.81%	135.74%	23,574
FAST	16.50%	6.25%	116.18%	231.90%	33,190
MSM	33.32%	18.14%	169.21%	149.31%	24,931
WSO	17.67%	-5.12%	207.13%	229.69%	32,969
MRO Fund	24.73%	12.09%	146.08%	186.66%	28,666
S&P 500	5.94%	20.05%	51.79%	21.75%	12,175
Dow Industrials	7.20%	21.30%	66.59%	27.64%	12,764

Selling DC space,expertise, and manpower - Sold on eBay, Shipped by Amazon.com

A New York Times article from a few months back caught my attention. The article details Amazon.com's efforts to sell distribution services to small businesses. In short, a small company can warehouse material in Amazon's distribution center(DC) where the material is stored until the time of order. When the small business receives an order Amazon.com ships the material directly to the end user thus eliminating or greatly reducing warehousing and distribution expenses for the small business. Amazon.com's idea of selling distribution services is an interesting idea and extension of their concept of selling web services such as data storage.

Do you think CDW, Grainger, or Henry Schein could sell their excess distribution center capacity to small businesses? If they had the capacity would the margins of the business be worth their time?

Recent Acquistions by B2B distributors

Grainger acquires McFeely's Square Drive Screws

Grainger announced that the McFeely brand will be marketed under their Lab Safety Supply umbrella, a Grainger subsidiary. Any thoughts as to why this wood screw manufacturer is not being integrated into the core Grainger brand?

Henry Schein acquires Becker-Parkin Dental Supply furthering their dominance in the niche dental supply market.

M&A and B2B Distribution

In the last two years mergers and acquisitions announcements have dominated the business news, as a wide array of private equity groups and strategic players have snapped up companies. Despite the feverish pitch of today's M&A activity I believe that significant consolidation is still on the horizon in the MRO supply and distribution sectors.

Grainger's (GWW) President and COO Jim Ryan recently told a group of analysts that Grainger is poised to take a greater share of the $145 billion MRO market in North America. Grainger is the current market leader in the industry with only 4% of the market share ($5.9 billion in revenues in '06). Given the fragmented nature of the MRO market it is likely that a good deal of Grainger's growth will come through acquisitions. However, with attractive gross profits margins ranging between 40-46% for large MRO distributors (Grainger,MSC, McMaster-Carr) Grainger will likely be competing with other strategic and institutional investors for potential acquisition targets.

This blog will follow M&A activity within the the B2B distribution sector. Additionally the blog will follow interesting trends in distribution, supply chain management, and manufacturing. I welcome your comments and hope to foster a constructive dialogue about this unique market sector.