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Why Hold Strategy is Apt for Grainger (GWW) Stock Right Now

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W.W. Grainger, Inc. (GWW - Free Report) is gaining from stellar third-quarter 2020 results, investments in growth initiatives, rising e-commerce sales and focus on strengthening the customer base. However, pandemic-related uncertainties and rising operating costs are likely to hurt the company.

Grainger currently carries a Zacks Rank #3 (Hold). It has a VGM Score of B. 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, offer the best investment opportunities for investors.

The company has an estimated long-term earnings growth rate of 9.9%.

Earnings & Sales Beat Estimates in Q3

Grainger reported adjusted earnings per share of $4.52 in the third quarter, beating the Zacks Consensus Estimate of $4.13. The figure increased 6% year over year as well. Net sales of $3.02 billion also surpassed the Zacks Consensus Estimate $2.97 billion and improved 2.4% year on year.

Positive Earnings Surprise History

Grainger has a trailing four-quarter average earnings surprise of 2.35%.

Return on Equity (ROE)

Grainger’s trailing 12-month ROE supports its growth potential. The company’s ROE of 41.3% compares favorably with the industry’s average ROE of 9.8%, reflecting that it is more efficient in utilizing shareholders’ funds.

Growth Drivers in Place

The company accomplished the goal of remerchandising a record $1.2 billion of products in the United States in 2019 and is on track to complete another $1.6 billion this year. Aided by its investments in growth initiatives, Grainger expanded the U.S maintenance, repair and operating (MRO) market by 150-200 basis points (bps) in 2019. So far this year, the company has consistently outpaced the U.S MRO market.

During the September-end quarter, Grainger’s U.S. Segment sales outgrew the U.S. MRO market by 850 basis points. Grainger will continue its efforts to strengthen relationships with both large- and mid-sized customers in order to improve sales-force effectiveness. It continues to re-engage lapsed customers and acquire new ones.

The company has witnessed a surge of COVID-19 pandemic-related product sales, such as personal protective equipment (PPE) and safety products on higher customer demand. Grainger expects increased levels of safety and cleaning product sales to large healthcare, government and critical manufacturing customers in the near term. Further, the pandemic has provided a significant boost to Grainger’s e-commerce sales. The company is focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities, and executing improvement initiatives within the supply chain.

Grainger’s Canada business is an attractive market and is anticipated to deliver double-digit operating margin growth over the next five years. The company has been focused on reducing its cost structure in the Canada operations to fuel growth, and is focused on making incremental investments in marketing and merchandising.

However, there are a few factors that are likely to impede growth.

The pandemic might affect Grainger’s businesses and operations in the days to come. Weakness in heavy manufacturing will affect the company’s sales as it contributes around 18% of the total sales. Moreover, higher operating costs in response to the pandemic and related activities are might erode its operating margins in the upcoming quarters.

Share Price Performance

The stock has appreciated 41.6% over the past six months, compared with the industry’s growth of 64.7%.



Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Crown Holdings, Inc. (CCK - Free Report) , iRobot Corporation (IRBT - Free Report) and SiteOne Landscape Supply, Inc. (SITE - Free Report) . While Crown Holdings and iRobot flaunt a Zacks Rank #1, SiteOne Landscape carries a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Crown Holdings has a projected earnings growth rate of 11.7% for fiscal 2020. Over the past six months, the company’s shares have appreciated 56.2%.

iRobot has an estimated earnings growth rate of 18.8% for the ongoing year. The company’s shares have gained 19.2% over the past six months.

SiteOne Landscape has an expected earnings growth rate of 28.6% for 2020. The stock has climbed 51.7% in six months’ time.

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