Morningstar - Q4 2020 - 84

Investors

distribution is very fragmented. Grainger GWW
is one of the larger players there, with only
mid-single-digit market share. Grainger is the most
exposed because they're selling a lot of oneoff items, where the customer is looking
for the lowest price. Grainger had to reduce cost
or pricing to compete, and they did.
But they're never going to get back to where
they were. There is more price competition and
pricing transparency, not just from Amazon
Business but from other online competitors as well.
I am concerned about Grainger, because
they're still trying to go after Amazon at their own
game. They should focus more on their traditional
business, which has more of a moat.
I'm not concerned that any of the other
distributors we cover have seen their competitive
standing versus Amazon deteriorate. They have
strategies to try to get closer to the customer-
Fastenal FAST is putting stores within their
customers' manufacturing facilities, for example.
The ones that will be hurt are the momand-pop local distributors that don't have the
e-commerce capabilities or any sort of
service component.
Distributors for the most part have done pretty
well so far during the pandemic. It may seem
surprising if you don't know these names, because
this is a very cyclical industry, at least from
a top-line and margin perspective. But they sell
safety and janitorial equipment, and demand for
that has surged. Obviously, that's not sustainable,
but it's helped them so far.
Lallos: What are your biggest concerns, and what

makes you optimistic?

Bernard: For the names I cover, especially the
homebuilders and the building products, I worry
that valuations have gotten ahead of themselves.
If you have a quarter where things are just
not quite what the market expects, there could be
an impact on the stock prices. That can be an
opportunity longer term, though.

As for optimism, I'm optimistic that the aerospace
and defense space can get back to where it
was. Eventually, we'll get a handle on this virus.
Not everyone agrees on what's going to happen

84

Morningstar Q4 2020

Over and Under Many of the industrials stocks mentioned here were fairly valued
at the end of September, with a Morningstar Rating of 3. These are the outliers:
Company

Price ($)

Fair Value ($)

Price/Fair Value

18.13

36.50

0.50

QQQQQ

165.26

264.00

0.63

QQQQ

D.R. Horton DHI

75.63

59.00

1.28

QQ

Fastenal FAST

45.09

33.00

1.37

Q

Fortune Brands Home & Security FBHS

86.52

66.00

1.31

QQ

Lennox International LII

272.61

184.00

1.48

QQ

Rockwell Automation ROK

220.68

183.00

1.21

QQ

SAP ADR SAP

155.81

124.00

1.26

QQ

Tesla TSLA

429.01

195.00

2.20

Q

Trane Technologies TT

121.25

98.00

1.24

QQ

W.W. Grainger GWW

356.77

289.00

1.23

QQ

44.02

91.00

0.48

QQQQQ

Airbus ADR EADSY

Boeing BA

Wesco International WCC

Morningstar Rating

Source: Morningstar Direct. Data as of 09/30/2020.

with the business traveler, but these businesses
will get back to a more normal state.
Aguilar: The International Air Transport
Association said it will take four to five years for
demand for global passenger air travel to recover.
But I think the outlook will change as we get
a vaccine. It won't mean that the problem is gone,
but there will be ways to live with COVID.

As Warren Buffett always says, you can't bet
against America and win. This country has
gone through a lot of different types of disruptions.
Never doubt our R&D ingenuity. We've made
progress with a vaccine in a record amount of time.
Bernard: Something else to be optimistic about
is a potential infrastructure spending bill. Biden
has one; Trump has one. Even if half of what
they want goes through, that will benefit a lot of
our stocks. We didn't talk about Caterpillar CAT
or Terex TEX-they will benefit from infrastructure
spending. Spending on communications and 5G
would benefit Wesco International WCC.
Aguilar: There seems to be broad bipartisan
support for infrastructure spending. That could be

a catalyst for these stocks. Even for a company
like John Bean Technologies JBT-right
now, aerospace is in a pinch, but it could benefit
from spending on things like gate passenger
bridges, improving airports. Then there's
maintaining, hardening, and improving the aging
grid and making it smarter.
Hubbell HUBB is a mid-cap conglomerate that's
mostly focused on utility solutions, specifically
transmission and distribution components,
and owns well-regarded electrical component
brands. The electrical components market
is a $56 billion or so market, and they focus on
that space.
Bernard: Wesco distributes products for Hubbell,
and its utility distribution business has been
very strong, with organic sales up year over year
for 12 straight quarters. Wesco is very undervalued;
we have it at 5 stars, and I think it's a great
investment at current prices.
Aguilar: Overall, there are plenty of reasons
for optimism. K
Laura Lallos is managing editor of Morningstar magazine.



Morningstar - Q4 2020

Table of Contents for the Digital Edition of Morningstar - Q4 2020

Contents
Morningstar - Q4 2020 - CT1
Morningstar - Q4 2020 - CT2
Morningstar - Q4 2020 - Cover1
Morningstar - Q4 2020 - Cover2
Morningstar - Q4 2020 - 1
Morningstar - Q4 2020 - 2
Morningstar - Q4 2020 - Contents
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