Time-Out: Special Situation of a Capital Change (BB) GWW

Thin ICe

 I spilled spot remover on my dog. Now he’s gone. — Steven Wright

W. W. Grainger (GWW)

Someone asked what data tools do I use.  My brain and a Value-Line.

Try to look at the Value-Lines WITHOUT looking at the price of the stock. What would you pay for this entire business–not knowing what it did and the current price of the company?  Start with the numbers (excluding the stock price, at first) so to keep your prejudices at bay.   Maybe have a friend print out the Vale-Line and cut off the top of the page.

GWW_VL Jul 2014 and GWW_VL   Something should strike you about this business. What?  Asset or franchise?

A competitor: Fast VL

Grainger_ Capital Allocation-FINAL Whoa? An announcement of a capital structure change–so a type of special situation.  What does this mean?

Grainger_ 2015FactBook Time to dig deeper Grainger_2014_ARGrainger 14BALSTGrainger 14EARN

Ok, about what is this company worth and what type of return could I expect at today’s _____ price?

Not a recommendation! Do your own thinking because then you learn from your mistakes AND successes.

If you don’t know or are not sure; it is just too tough, difficult, or confusing, then you can always do this:

Lyrics

And when I see the sign that points one way
The lot we used to pass by every day

Just walk away, Renee
You won’t see me follow you back home
The empty sidewalks on my block are not the same
You’re not to blame

From deep inside the tears that I’m forced to cry
From deep inside the pain that I chose to hide

Just walk away, Renee
You won’t see me follow you back home
Now, as the rain beats down upon my weary eyes
For me, it cries

Just walk away, Renee
You won’t see me follow you back home
Now, as the rain beats down upon my weary eyes
For me, it cries

Your name and mine inside a heart upon a wall
Still finds a way to haunt me though they’re so small

Just walk away, Renee
You won’t see me follow you back home
The empty sidewalks on my block are not the same
You’re not to blame

10 responses to “Time-Out: Special Situation of a Capital Change (BB) GWW

  1. I get $282.95 for W.W. Grainger.

    You have 67.44 million s/o. Assuming average repurchase is $300, you reduce 10 million s/o in two years, so you’re left with 57.5 s/o (rounded). However debt increases so TEV in two years would be (57.5*234.1 + 484.8 + 1800 + 65.9) = 15.9 bil TEV on EBIT of 1.65 bil? (16.5% operating margin on 10 bil on revenue in 2 years). A 9.6x TEV/EBIT multiple.

    The business isn’t as good as FAST however both of them do 20%+ return on total capital and return on shareholder equity. FAST trades for 16x TEV/EBIT (12703.3/(494.2/(1-0.372))). I’ll be conservative and use 13x for GWW, due to leverage and similar return characteristics so that gives me $21.45 bil TEV minus debt and leasing of 2.35 and divided by s/o of 67.5 which gives me $282.95. A 15% m.o.s. from today’s price.

    Just for fun, depending on how confident you are, you can increase the multiple for GWW. A 14x TEV/EBIT multiple would compute a $307.39 valuation for example. A 25% m.o.s. from today’s price.

    • Trevor, I might be missing something but it seems to me that analysis is somewhat inconsistent in that it calculates the price two years hence based on the stocks outstanding today. I don’t see how the reduction in shares outstanding is value-enhancing in your analysis.

      • I did that because they haven’t bought a single share yet but you’re right, I should have used the post-repurchase numbers for intrinsic value.

  2. Good work. I generally concur, but why do you say fast has a better business?

    • Based on the Value Line, they have higher margins and return on total capital is higher than GWW.

      • I also want to say, that’s how I’ve learned it from doing your case studies. I learned A LOT on value investing by reading this website.

        Thanks a ton for all of the resources you have posted.

  3. Isn it TEV = Market capitalization + Total Debts + Minotiry Interest – Excess cash – other non-operating assets?

    Then (57.5*234.1 + 484.8 + 1800 + 65.9-226)=15.6 bil TEV

    or TEV/EBIT ratio to 9.4 which is a little better 🙂

    • Are you sure you can just deduct all of the cash on the balance sheet? Are you sure the cash is actually “excess”? I’m not familiar enough with how much cash they need on their balance sheet so I included it in TEV.

  4. Trevor, you might look at their cash flow cycle but I don’t think they need more than 1% to 2% of their cash, the rest being excess. A business like McDonald’s would have a negative need for cash since their customers pay them immediately while they pay their vendors in 30/60/90 days.

    If the valuation is so close that 1% or 2% of cash makes a difference then you just pass.

    Another way to look at it might be your 9.6 EV/EBIT means 10% pre-tax or 6% to 6.5% post tax earnings yield then add the high probability of 5% say of growth to get you 11% to 12% return. You are confident in the growth in the beginning because of the buy-back. 10% to 12% is outstanding in a market like this–but if the world ends, your downside will be less but your future return will rise.

    GWW and FAST seem to operate in a quasi-oligopoly. There is a fear that Amazon will encroach on their lower-end customers, but we are going by the numbers.

  5. Is it correct to use post-tax earnings yield + expected growth rate to arrive at a proxy for returns?

    Isn’t it more appropriate to use dividend yield + expected growth rate instead?

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