Four leading industrial distribution companies, Grainger, Inc., Hughes Supply, Inc., WESCO Distribution, Inc. and National Waterworks, Inc., stand to benefit from good organic growth in the intermediate term, according to a recently published report by Standard & Poor's Ratings Services, "How Four Leading Industrial Distributors Profit from Good Demand and Navigate Sector Challenges." Of those four companies, National Waterworks, Inc. had total debt outstanding of $2.13 billion at year-end 2004.

"This report provides an overview of the industrial distribution market—which we estimate to be about $275 billion of sales—why we believe the industry will have good organic growth in the intermediate term, as well as some of the larger risks inherent in the sector," said Joel Levington, Standard & Poor's credit analyst.

According to the report, sales of larger distributors have grown, and should continue to grow, at a faster rate than those of smaller industry participants, as the main participants continue to offer increasing value for customers. They are able to do this by expanding their geographic reach, sharing some of the benefits they get from consolidating their own vendor lists, reducing transactional costs through electronic interfaces, and offering incremental services, such as integrated supply.

"We believe that the industry should experience good organic growth in the intermediate term," said Levington. "Key demand drivers will be continued improvement in the U.S. manufacturing sector and the strengthening of the commercial construction market from quite weak levels."

The report also expanded on some of the challenges that distributors are facing. According to the report, the four peers in the report combined had 12-month revenues trailing by $14.7 billion, or less than 5.5 percent of the estimated market size. High market fragmentation can lead to intense pricing pressures within many of the niche markets.

Other challenges include manufacturing expanding overseas, particularly to China; the need to implement a system to update and maintain integrated information systems; and the threat of new competition in the form of logistics companies.