If a recession is right around the corner, someone forgot to tell W.W. Grainger, Inc. ( GWW - Analyst Report ) . The company recently reported its 5th consecutive positive earnings surprise on strong revenue and margin expansion.

Management also raised its guidance for the remainder of the year, prompting analysts to revise their estimates higher. It is a Zacks #2 Rank (Buy) stock.

The company also pays a dividend that yields a solid 2.1%, and valuation looks reasonable with shares trading below their 10-year median.

Company Description

W.W. Grainger distributes maintenance, repair, and operating (MRO) supplies such as motors, tools, fasteners, and safety gear.

It is headquartered in Lake Forest, Illinois and has a market cap of $9.5 billion.

Strong Second Quarter Results

Grainger recently reported better than expected results for the second quarter. Earnings per share came in at $2.22, beating the Zacks Consensus Estimate by 5%. It was a 35% increase over the same quarter in 2010.

Sales rose 12% to $2.00 billion, ahead of the Zacks Consensus Estimate of $1.97 billion. Sales in the United States increased 9% due to both higher prices and volumes. Sales in Canada were up a stellar 16% in local currency driven by a 12% increase in volumes.

Gross profit expanded from 41.9% of sales to 43.1% in the quarter while the operating margin increased 120 basis points to 13.2%.

Outlook Still Looking Good

Management raised the upper and lower ends of its earnings guidance following strong second quarter results. The company now expects 2011 earnings per share between $8.40 and $8.70 on sales growth of 9-10%.

This prompted analysts to revise their estimates significantly higher, sending the stock to a Zacks #2 Rank (Buy).

Consensus estimates have risen considerably over the last several months as Grainger has delivered five consecutive positive earnings surprises. The stock price had risen considerably over the last several months too, until the recent stock market pullback sent shares falling.

If a recession really is right around the corner, then the drop in share price is probably justified given the cyclical nature of its business. A recession isn't showing up yet in Grainger's numbers, however, as both management and analysts expect a strong second half of the year for the company.

The Zacks Consensus Estimate for 2011 is $8.78, representing 29% growth over 2010 EPS. The 2012 consensus estimate is currently $9.91, corresponding with 13% EPS growth.

Steady Dividend Hikes

Grainger also pays a dividend that yields a solid 2.1%. The company has been steadily raising its dividend over the last several years as it has consistently grown its revenue and EPS. Since 2000, for instance, Grainger has raised its dividend at a compound annual growth rate of 12.8%.

Reasonable Valuation

Valuation looks reasonable with shares trading at 14.1x 12-month forward earnings, a discount to its 10-year median of 16.8x.

The company's ROE over the last 12 months is a stellar 25.3%, well ahead of the industry average of 9.6%. This justifies its price to book ratio of 3.6, which is a premium to the industry average of 1.4.

The Bottom Line

With strong sales and EPS growth projections, steadily rising earnings estimates and a solid dividend yield, the recent weakness in the stock price may be a bit overblown, providing astute investors with a great opportunity.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.