Company Profiles

Value Delivered: Wholesale Distribution Top Ten

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Fastenal Company, Reliance Steel & Aluminum and Watsco have been the top rated wholesale distributors for several years.

Highly-rated wholesale distribution companies share three common characterisitics that have propelled them to the top of a challenging industry.

Fastenal's company slogan is "Growth Through Customer Service" yet few companies have implemented the common mantra as successfully as the Minnesota-based wholesale distributor that once again sits atop the industry rankings in financial performance, according to the lastest industry analysis from CreditPulse.  Three other companies, Reliance Steel & Aluminum and Watsco, round out the industry's upper echelon, but fall well short of Fastenal in market value.

Fastenal Company, a distributor of fasteners and construction materials with 2020 revenue of $5.6 billion and a market value of $30 billion, is once again the number one ranked company in the wholesale distribution industry group of the Credit Standards Index (CSI) with a score of 2.00 on a scale of 1.00 to 5.00 with 1.00 being the highest rated.  Fastenal reclaimed the top spot after losing it to Watsco Inc in the 2018 CSI.

The CSI is an index of almost 3,000 publicly-traded companies from around the world organized into precise industry groupings for the purpose of providing global credit risk information, performance analytical data, industry trends and company rankings.  The CSI is researched and prepared every two years by CreditPulse.  Companies are rated based on score composites in critical areas such as credit risk, receivables efficiency, operating cash flow, liquidity and solvency.

"Fastenal is quite simply one of the finest companies in America and indeed the world," said John Bassford, senior credit analyst at CreditPulse.  "They have few peers in this industry because they have stayed on the cutting edge of technology in areas such as inventory control, ecommerce and other digital platforms while at the same time maintaining a strong personal and physical presence in every market."

Maximum effeciency and innovation have boosted Fastenal's credibility with investors, an area where the company really shines with a market capitalization to revenue ratio of 4.35 as of June 30, 2020 and 5.38 when compared with the current maket cap of $30.38 billion (the market cap of a company is determined by multiplying its stock price by total outstanding shares).  Fastenal's market value is even more impressive considering the fact that it resides in one of the worst industries for capital investment.  The average market cap to revenue ratio for wholesale distribution in 2020 was an anemic 0.60. 

An analysis of the three top performing companies in the industry show three common characteristics: strong operating cash flow, high liquidity and working capital and low debt.  It also didn't hurt that all three companies had profit margins of five percent or above, but Fastenal is the leader there as well with a net profit of 15.2%.  The Minnesota-based firm was second in operating cash flow as a percent of revenue at 19.5%.

Meanwhile, the companies at the bottom of the industry, led by Sysco Corp, Rexel SA in France and SIG plc in the United Kingdom, were hurt by low operating cash flows, higher levels of debt and liabilities and high levels of credit risk as determined by the bad debt allowance, an important working capital measurement. The market values of these companies are proportionately lower as well.

Los Angeles-based Reliance Steel & Aluminum is the second ranked company in the industry with a CSI score of 2.10, only a tenth of a point behind Fastenal.  Like Fastenal, Reliance has an enviable cash flow statement and balance sheet.  The company generated 13.3% net operating cash as a percent of revenue in 2020 and had the third highest current ratio in the industry at a staggering 5.08 to 1.00.  Only Universal Corp and Weyco Group were higher at 5.53 and 5.52 repectrively.

But, more importantly, Reliance has very little debt compared with revenue and one of the lowest ratios of liabilities to assets in the industry at 0.37, fifth best.  Reliance also has one of the lowest DSOs in the industry at 38.37 days. 

Reliance is similar to Fastenal in another area -- organizational structure.  Like Fastenal, Reliance's sales distribution operation is decentralized, which means credit and operational decisions are not controlled out of a corporate office.  However, unlike Fastenal's various branches, Reliance's sales structure encompasses a number of different companies that represent various specialties within the metals distribution business.

Watsco Inc, an air conditioning, heating and refrigeration equipment distributor based in Miami, Florida, rounds out the top three with a CSI score of 2.20.  Watsco was incorporated in 1956 and is the largest HVAC distributor in North America with 600 locations in 38 U.S. states, Canada, Mexico and Puerto Rico, according to the company's 2020 10K filing. 

Watsco fell to third in the 2020 rankings, just two tenths of a point behind Fastenal, after achieving the same score with Fastenal in the previous two CSI rankings in 2018 and 2016.  Watsco's drop was the result of lower operating cash at 10.6% and lower liquidity as determined by current ratio at 3.05, both well above the industry standards.

Watsco utilizes what it calls a "buy and build" philosophy that focuses on long-term growth in revenue and profits.  The "buy" component of the strategy focuses on acquiring companies that are market leaders using what the company calls a "disciplined and conservative" approach.  The "build" component focuses on improving growth by improving customer service and investing in scalable technologies.

Meanwhile, the company at the bottom of the index for 2020 with a score of 4.00 is Sysco Corp, the country's largest food distributor.  Sysco struggled with high levels of bad debt, low operating cash flow and the fourth highest debts-to-assets ratio in the industry at an alarming 0.95.  Companies are insolvent at 1.00.  Sysco's rating was severely affected by the pandemic as many of the company's restaurant and hotel customers were forced to shutdown.  Sysco was ranked 27th in the 2018 index.

The company ranked 59th is French electronics giant Rexel SA with a score of 3.90.  However, one company that would likely be at the bottom of the industry if not for its low bad debt and artificially low DSO due to an off-balance sheet facility is AmerisourceBergen Corp.  AmerisourceBergen, the second largest company in the industry with annual revenue of $190 billion, is the only distributor with the lowest possible scores in operating cash flow, liquidity and solvency. 

AmerisourceBergen is not getting any relief from the stock market as the company's market value as of June 30, 2020 was only $20.5 billion for a market cap to revenue ratio of only 0.11, the 7th lowest in the industry.  AmerisourceBergen and McKesson Corp are the only two companies in the industry with current ratio's under 1.00.

The complete industry ranking is available to subscribers.
Written by John Bassford, CreditPulse senior credit analyst