WW Grainger, Inc. - Fundamental Investment Idea

Qualitative Concerns

• Grainger  faces  intense competition from Amazon.  Amazon has entered the market focused on mostly  tail (less  frequent) purchases but should continue to rapidly take  share, grow delivery costs, and increase transparency.
• Berkshire Hathaway has entered the market providing  services to small distributors. The services should increase  convenience and pricing transparency while allowing small  distributors to slow the loss of market share to Grainger.
• Revenue and volume comps are more difficult going forward  in an uncertain macros environment.

Fundamental Concerns

• Gross margins have already started to show pressure but competition and pricing problems are only increasing.
• EBITDA margins are also under long term pressure with a long way to fall compared to Amazon. Grainger has cut  SG&A to improve margins in the short term but increased shipping and fuel costs could be a headwind.
• Cash flow has recently started to deteriorate despite  stretching payables. OCF was down in the most recent  quarter.
• ROIC is in a downward trend with leverage increasing.
• Valuation appears stretched with plenty of downside.