W.W. Grainger, Inc. distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products.
The most important thing to understand about Grainger is the nature of the orders customers are placing with the company. The orders can be fairly random looking – almost every business needs a mop, a screwdriver, a small motor, a light bulb, etc. even if it’s far from the core business. The average order size is small, but needs to be filled rapidly. Customers often require next day shipping on most items. This means Grainger has to keep a lot of inventory on hand. They also have to offer credit terms to customers. So Grainger has a lot of inventory and a lot of receivables. It has low turns. But, it has high margins. This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be. Can a middleman really mark-up basic, boring products like we’ve talked about here – mops, buttons, motors, light bulbs, etc. – by 50% to 70% over the price they paid for that product? The answer is yes.
Grainger has grown 10% a year since going public 40 years ago. And, it has grown sales to large
businesses by more than 8% a year since the financial crisis. Earnings grow even faster than sales. So, Grainger is a growth stock. In fact, it’s a growth at a reasonable price stock.