During the recent two-year period of quantitative tightening, rising interest rates disproportionately impacted companies, particularly those with long-duration assets—such as high-growth firms with negative earnings—and those with substantial debt burdens facing increased financing costs.

This led to margin contractions, especially where refinancing was necessary. Companies with elevated valuations faced sharper declines, as rising discount rates mechanically reduced their valuations.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

In contrast, the industrial distribution industry—comprising supplies and equipment for gardening, construction, and machinery (both residential and commercial)—demonstrated resilience. Despite belonging to a category typically sensitive to leverage, with median debt-to-equity ratios close to parity in recent years, margin impact was minimal.

This stability was attributed to operational excellence, predictable cash flows, and diversified business segments, all of which were valued by investors cautious of long-duration assets amid the most aggressive interest rate hikes in decades.

As a result, the industry outperformed the broader market over three- and five-year on an equal-weighted basis. However, sentiment has begun to shift as monetary policy pivots and inflation subsides, evidenced by recent underperformance relative to the broader market.

The inflation hedge characteristic of this service-oriented industry has become less relevant as attention shifts toward a more accommodative monetary stance, reflecting potential signs of economic decline in the medium term.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

One might argue that, despite recent short-term underperformance, the industry’s inherent lack of cyclicality could prove advantageous if macroeconomic conditions deteriorate in the coming quarters, especially given that valuation metrics are currently at historical norms.

Similar to other short-duration industries studied, market capitalization and business stability play crucial roles in performance. For example, industry leader W.W. Grainger Inc. has consistently improved margins quarter over quarter while sustaining growth.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA