W.W. Grainger vs. Fastenal: Which Industrial Stock is a Better Buy?

W.W. Grainger, Inc. (GWW) in Lake Forest, Ill., distributes maintenance, repair, and operating products and services internationally. The company provides material handling equipment, safety and security supplies, and lighting and electrical products. In comparison, Fastenal Company (FAST), which is headquartered in Winona, Minn., engages in the wholesale distribution of industrial and construction supplies internationally. It offers fasteners and related industrial and construction supplies under the Fastenal name.

The continued spread of COVID-19, along with an inflationary environment, are causes for concern for investors seeking to benefit from the economic recovery. However, the Fed’s continued near-zero interest rate policy, rapid vaccination programs, and supportive government policies have boosted the industrial sector’s growth. Furthermore,  President Biden's bipartisan infrastructure bill proposal, which includes $550 billion in new spending for building roads, rails, and bridges, among others, is expected to help the sector grow significantly in the coming months. So, both GWW and FAST should benefit.

GWW has gained 5.2% in price over the past three months, while FAST has returned 3.7%. Also, GWW’s 26.4% gains over the past nine months are higher than FAST’s 22.3% returns. And GWW is the clear winner with 17.5% gains versus FAST’s 9.9% returns in terms of their past months’ performance.

Click here to check out our Industrial Sector Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 29, 2021, DG Macpherson, GWW’s Chairman and CEO, said, “Despite the current market and supply chain uncertainties, we are confident in our ability to deliver solid performance in the fourth quarter and into 2022."

On August 5, 2021, FAST teamed with Penske to pilot freightliner electric tractors. Dan Florness, FAST’s president and CEO, said regarding the collaboration, "It also gives us a chance to help accelerate the development of commercial EV technology."

Recent Financial Results

GWW’s net sales increased 12% year-over-year to $3.37 billion for its fiscal third quarter, ended September 30, 2021. The company’s adjusted operating earnings grew 17% year-over-year to $438 million, while its adjusted net earnings increased 21% year-over-year to $297 million. Also, its adjusted EPS increased 25% year-over-year to $5.65.

FAST’s net sales increased 10% year-over-year to $1.55 billion for its fiscal third quarter, ended September 30, 2021. The company’s operating income grew 9.8% year-over-year to $318.40 million, while its net earnings increased 9.9% year-over-year to $243.50 million. Also, its EPS increased 9.7% year-over-year to $0.42.

Past and Expected Financial Performance

GWW’s net income and EPS have grown at CAGRs of 8.6% and 11.4%, respectively, over the past three years. Analysts expect GWW’s revenue to increase 10.4% for the quarter ending December 31, 2021, and 9.3% in its fiscal year 2021. The company’s EPS is expected to grow 41% for the quarter ending December 31, 2021, and 20.3% in its fiscal year 2021. Furthermore, its EPS is expected to grow at a 15.4% rate per annum over the next five years.

FAST’s net income and EPS have grown at CAGRs of 6.6% and 6.5%, respectively, over the past three years. The company’s revenue is expected to increase 7.5% for the quarter ending December 31, 2021, and 5.1% in its fiscal 2021. Its EPS is expected to grow 5.9% for the quarter ending December 31, 2021, and 5.4% in fiscal 2021. FAST’s EPS is expected to grow at a 6.3% rate per annum over the next five years.

Profitability

GWW’s trailing-12-month revenue is 2.16 times what FAST generates. However, FAST is more profitable, with a gross profit and net income margins of 45.97% and 15.25%, respectively, compared to GWW’s 35.66% and 7.36%.

FAST’s 17.70% and 20.71% respective ROA and ROTC are higher than GWW’s 13.89% and 19.46%.

Valuation

In terms of forward non-GAAP PEG, FAST is currently trading at 5.21x, which is 194.3% higher than GWW’s 1.77x. And FAST’s 36.27x forward non-GAAP P/E ratio is 51.1% higher than FAST’s 24.01x.

So, GWW is relatively affordable here.

POWR Ratings

GWW has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. FAST has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Both GWW and FAST have A grades for Quality. This is justified given GWW's 46.89% trailing-12-month ROCE, which is 261.2% higher than the 12.98% industry average. In contrast, FAST’s 30.42% trailing-12-month ROCE is 134.3% higher than the 12.98% industry average. Both GWW and FAST have B grades for Momentum. This is justified given GWW’s 33.7% and FAST’s 31.3% respective gains over the past year. In addition, Both GWW and FAST have B grades for Stability, which is in sync with their 0.99 beta.

Of the 90 stocks in the Industrial - Equipment industry, GWW is ranked #28, while FAST is ranked #48.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, and Sentiment. Click here to view all the GWW ratings. Also, get all the FAST ratings here.

The Winner

While both GWW and FAST are expected to gain from the industrial sector’s growth, we think it is better to bet on GWW now because of its lower valuation and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Industrial – Equipment industry here.

Click here to check out our Industrial Sector Report for 2021

GWW shares were trading at $470.93 per share on Tuesday afternoon, up $3.01 (+0.64%). Year-to-date, GWW has gained 16.64%, versus a 24.74% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...