We Still Need Tools

By William Bias - August 22, 2012 | Tickers: FAST, MSM, GWW | 0 Comments

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In today’s world we read and hear so much about high tech companies such as Apple and Microsoft that we forget about the companies that sell items such as wrenches, nuts and bolts. People as well as governments and businesses need these items to keep them going. Looking at the fundamentals (see table below) of companies like W.W. Grainger (NYSE: GWW), MSC Industrial (NYSE: MSM), and Fastenal (NASDAQ: FAST) tells me one thing is certain -- we still need tools and supplies to keep our office buildings and factories in good repair.

Source: Compiled from company Form 10-Ks

Grainger clearly leads the maintenance, repair and operations market with $8 billion in revenue in 2011. They also lead in free cash flow. The revenue growth of all three companies emphasizes that the world appetite for screwdrivers, nuts and bolts not only exists but is growing.

Grainger also leads the way in acquisitions as they expand into the overseas markets. For 6 months ending June 30, Grainger spent $24 million on acquisitions. A large presence in international markets is a huge advantage that Grainger and Fastenal have over MSC Industrial, which has almost no international presence. MSC Industrial derives 3% of their revenue from the UK only. Consolidations are common in the maintenance, repair and operations business because the vast majority of large business clients are trying to reduce the number of suppliers. The three companies mentioned here are also trying to respond to this trend by expanding product line offerings to become the one-stop vendor of choice for their business customers.

Something I found interesting about this business is the increasing use of vending machines. Grainger, Fastenal or MSC Industrial can place a vending machine at a client facility filled with items (such as D cell batteries, work gloves and cutting tools) that they use on a regular basis. What’s better, at least in Fastenal’s case, is that the vending machines can provide usage and cost data to help the client company evaluate expenditures and control cost. It is a novel and efficient concept to install machines that dispense much needed supplies on site. This provides for greater accuracy in dealing with consignment and cost issues; something that could really ease a burden for a stressed out purchasing agent.

The three companies above have similar attributes. If picking one that I would investigate for possible investment it would be Grainger. They have the highest growth in free cash flow and the largest revenue amount. I believe if anyone could dominate the consolidation wave Grainger could do it. In 2011 Grainger had a half billion dollars in free cash flow that they could use in acquisitions and expansion of product lines to make themselves the exclusive vendor of choice for a large number of businesses looking to lower their number of suppliers. They also have a large international presence. It is evident that the world still needs nuts, bolts and tools to make it go around, but don’t take my word for it, do your due diligence. That is the Foolish Way.

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