Cantillon Capital Management's key 1Q 2014 positions (Part 4 of 7)
Cantillon Capital and W.W. Grainger
William von Mueffling’s Cantillon Capital Management’s saw one new position in its 1Q 2014 portfolio, in Sirona Dental Systems Inc. (SIRO), but no stake sales. Existing position increases included Fidelity National Information Services (FIS), W.W. Grainger Inc. (GWW), and Ambev SA-ADR (ABEV). Stake reductions included The Coca-Cola Co. (KO) and Waters Corp. (WAT).
W.W. Grainger Inc. (GWW) accounts for a 5.94% position in Cantillon Capital’s 1Q 2014 portfolio. This was an increase from 4.1% last quarter.
The company, which saw 2013 sales of $9.4 billion, is a broad-line distributor of maintenance, repair, and operating (or MRO) supplies and other related products and services, primarily in the United States and Canada, with a presence in Europe, Asia, and Latin America. The products the company offers include material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, building and home inspection supplies, vehicle and fleet components, and many other items—primarily focused on the facilities maintenance market. The company’s services primarily include inventory management and energy-efficiency solutions. The company’s two reportable segments are the United States and Canada. The United States segment reflects the results of Grainger’s U.S. operating segment. The Canada segment reflects the results for Acklands-Grainger Inc., Grainger’s Canadian operating segment.
The Federal Reserve stated that the overall industrial production increased 3.8% from March 2013 to March 2014, which benefited Grainger’s sales growth for 1Q 2014. The U.S. Department of Labor reported a 0.6% increase in manufacturing employment levels from March 2013 to March 2014. According to the Federal Reserve, manufacturing output increased 2.8% from March 2013 to March 2014. Grainger said its heavy and light manufacturing customer end-markets outperformed these indicators, as sales to these customer end-markets increased in the mid-single digits for the first quarter of 2014.
Despite full year 2014 forecasted growth for Canada being positive, the Canadian economy, in the first quarter of 2014, saw pressure, as the Canadian dollar was negatively impacted by a broad-based decline in commodity prices. Energy, metal, and agricultural prices were all lower, with few exceptions, according to Scotiabank. These factors, along with lower-than-expected job growth, impacted Grainger’s Canadian business, which heavily depends on the natural resources sector. The company said in its latest earnings release that it’s facing near-term economic and foreign exchange headwinds in Canada.
Grainger’s net earnings for 1Q 2014 increased 2% to $217 million versus $212 million in 2013. Earnings per share of $3.07 increased 4% versus $2.94 in 2013. Sales increased 5% to $2.4 billion in the 2014 first quarter versus the prior year. Results for the quarter included 2 percentage points from E&R Industrial and Safety Solutions acquisitions, net of dispositions of four direct marketing brands, and a 2 percentage point reduction from foreign exchange. The U.S. business was driven by continued market share gains with large customers. The company saw strong performance of its online businesses in Japan and the U.S. Grainger said it also witnessed some business disruptions due to the extreme weather that closed some customer and Grainger facilities across parts of North America during January and February.
The company said it used the cash generated during the quarter and cash on hand to invest in the business and return cash to shareholders through share repurchases and dividends. In the first quarter of 2014, Grainger returned $215 million to shareholders through $65 million in dividends and spent $150 million to buy back 615,000 shares of stock.
The company reiterated its full year 2014 guidance of 5% to 9% sales growth and earnings per share of $12.10 to $12.85.
News reports last year noted that Grainger has a 6% share of the highly fragmented $118 billion market for supplies.
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