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W.W. Grainger Inc. (GWW - Analyst Report) is set to report third quarter fiscal 2013 results before the opening bell on Oct 16. Let’s see how things are shaping up prior to the announcement.

Factors to Consider This Quarter

Grainger’s sound balance sheet, low debt level and cash flow characteristics allow the company to further invest in growth opportunities, raise dividends and reinvest capital through share repurchases. The company has been rewarding shareholders with consistent dividend hikes over the last 42 years, a record that only 3% of the S&P 500 companies can boast.

Grainger continues to expand is product offerings and strengthen its businesses across all operating regions, mainly in Asia and Latin America, as well as continually invest in e-commerce - its most profitable channel. Though this will benefit Grainger’s sales in the long term, sales growth has remained choppy in 2013. It has ranged from a low of 3% in March to 8% in Jan and Apr 2013. Growth in July and August remained at 4%, close to the year's slowest growth rate of 3% reported in March.

According to the latest reports, Grainger’s daily sales growth in the U.S. in September was trending above August level. However, sales were lower outside the U.S. due to slowing sales in local currency and unfavorable foreign exchange. Overall September sales growth had been reported in line with the August level.

Grainger has projected incremental growth-related spending of $150 million. Even though these initiatives will lead to additional share gains in the future, it will weigh on margins in the short term.

Earnings Whispers?

Our proven model does not conclusively show that Grainger is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (expected surprise prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP:  This is because the Most Accurate estimate stands at $3.04 while the Zacks Consensus Estimate is higher at $3.09. This comes to a difference of -1.62%.

Zacks Rank #3 (Hold): Grainger’s Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the peer group that can be considered, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Ingersoll-Rand Plc (IR - Analyst Report), Earnings ESP of +0.91% and a Zacks Rank #2 (Buy).

Generac Holdings Inc. (GNRC - Snapshot Report), Earnings ESP of +1.21% and a Zacks Rank # 3 (Hold).

Honeywell International Inc. (HON - Analyst Report), Earnings ESP of +0.81% and a Zacks Rank #2 (Buy)

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