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Reasons to Hold Grainger (GWW) in Your Portfolio for Now

Zacks Equity Research

W.W. Grainger, Inc. GWW is likely to gain on upbeat outlook, focus on strengthening its customer base, investments in e-commerce and digital capabilities amid input cost inflation and foreign exchange headwinds.

The company’s earnings have outpaced the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 13.5%. Grainger has an estimated long-term earnings growth rate of 12.1%.

Below, we briefly analyze the company's potential growth drivers and possible headwinds.

Factors Favoring Grainger

Upbeat Outlook: Grainger’s 2019 earnings per share are expected to be $17.10-$18.70, reflecting year-over-year growth of 2-12%. The bottom line is likely to be driven by operating performance and favorable tax rates. Grainger expects net sales growth of 4-8.5% year over year to $11.7-$12.2 billion in 2019. Gross margin is estimated between 38.1% and 38.7%. Operating margin is projected at 12.2-13.0%, expanding 20-100 basis points (bps) from 2018. The company expects tax rate between 24.5% and 27.5%.

Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $18.01 for 2019, reflecting year-over-year growth of 7.8%. For 2020, the Zacks Consensus Estimate for earnings is pegged at $19.97, highlighting year-over-year growth of 10.8%.

Price Performance: The stock has gained around 6.1% over the past year, outperforming the industry’s growth of 2.2%.

Growth Drivers
Rising Business Investments:  Grainger generates revenues from the distribution of MRO (Maintenance, Repair and Operating) supplies, products and related services. In the United States, business investments and exports are two major indicators of MRO spending. Business investments are likely to remain strong in 2019, supported by expanding global markets, lower capital costs and an improving regulatory environment.

Growth in E-Commerce:  Grainger is focused on improving end-to-end customer experience by making investments in its e-commerce and digital capabilities, and implementing improvement initiatives within its supply chain. Notably, the company intends to continue reducing cost base. The company has combined its Gamut and capabilities, and made incremental investments in digital marketing.

Turnaround in the Canada Business: Grainger has been focused on improving margins and reducing cost structure in Canada operations to drive profitable growth. The company expects the segment to deliver operating margin of 1-5% in 2019. The company also realized $45 million in savings related to its turnaround efforts.

Strong Momentum in the United States: Grainger is well positioned to benefit from efforts to strengthen relationships with customers in the United States. The company expects revenue growth in the United States segment to be 300-400 bps higher than the expected market growth of approximately 1-4%. Grainger projects operating margin at the segment to be 15.5-16.1% in 2019.
Favorable Rank & Score Combination:  The company carries a Zacks Rank #3 (Hold) and a VGM score of A. Here, V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 make solid investment choices.

Further, the company has a return on equity — a profitability measure — of 46.5%, better than the industry average of 38.4%. This reflects the company’s efficiency in utilizing its shareholders’ funds.
Few Headwinds to Counter

Grainger’s results are likely to bear the brunt of input cost inflation and foreign exchange headwinds. The company is also facing higher freight costs. Further, Grainger expects higher operating expenses, as the company is investing in digital marketing capabilities. Though these actions will yield long-term benefits for the company, it will hinder the company’s margin performance in the near term.

Bottom Line

At present, investors might want to hold on to the stock, as it has ample prospects to outperform peers in the near future.

W.W. Grainger, Inc. Price and Consensus


W.W. Grainger, Inc. Price and Consensus | W.W. Grainger, Inc. Quote


Stocks to Consider

A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc MLI, Lawson Products, Inc. LAWS and Albany International Corp. AIN, each sporting Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mueller Industries has an expected earnings growth rate of 2.2% for 2019. The company’s shares have rallied 19.6% over the past year.
Lawson Products has an impressive projected earnings growth rate of 102.5% for the current year. The stock has appreciated 18.9% in a year’s time.
Albany International has an estimated earnings growth rate of 44.7% for the ongoing year. The company’s shares have gained 12.5% in the past year.

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