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Reasons to Retain Grainger (GWW) Stock in Your Portfolio

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W.W. Grainger, Inc. (GWW - Free Report) is gaining from forecast-beating first-quarter 2022 results. Growth in core, non-pandemic products volume and strong momentum in the High-Touch Solutions and Endless Assortment segments are aiding growth. Efforts to strengthen customer relationships and investments in growth initiatives will continue to support the top line. Benefits from price realization and cost-reduction actions will boost margins.

Earnings & Sales Surpass Q1 Estimates: Grainger reported impressive first-quarter 2022 results, with earnings and sales beating the respective Zacks Consensus Estimates and improving year over year.

Positive Earnings Surprise History: Grainger, a Zacks Rank #3 (Hold) company, has a trailing four-quarter earnings surprise of 4.35%, on average.

Positive Growth Expectations: The company’s earnings estimate for the current year is pegged at $26.04, suggesting year-over-year growth of 31.2%.

Upbeat View: Grainger projects current-year net sales between $14.5 billion and $14.9 billion, up from its prior guidance of $14.1-$14.5 billion. In 2021, the company reported sales of $13 billion. The company expects total daily sales growth between 11% and 14%. Grainger raised its earnings per share guidance to the band of $25.00-$27.00 compared with the previous expectation of $23.50-$25.50. The updated guidance indicates year-over-year growth of 30% at the midpoint. GWW’s margin will continue to gain traction from improved pandemic product mix, pricing actions and its ability to navigate supply chain challenges.

Return on Equity: Grainger’s trailing 12-month ROE supports its growth potential. The company’s ROE of 53.1% compares favorably with the industry’s average ROE of 3.7%, reflecting that it efficiently utilizes shareholders’ funds.

Underpriced: Grainger’s price-to-earnings ratio shows that shares are underpriced at the current level, which seems attractive for investors. The company has a trailing P/E ratio of 21.5, which is below the industry average of 36.3.

Price Performance: Grainger’s shares have gained 5.7% in the past year compared with the industry’s decline of 55.2%.

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Growth Drivers

In the High Touch Solutions North America (N.A) segment, Grainger is witnessing revenue growth in nearly all the end markets, driven by double-digit revenue growth across all of the company’s North American regions and expansion in both large and midsize customers. The Endless Assortment segment gains from strong customer acquisition at Zoro and MonotaRO business.

Grainger is investing in the non-pandemic product inventory and partnering with suppliers to mitigate supply-related challenges, inbound lead time challenges and possible cost increases. The company saw strong growth in non-pandemic product sales as the U.S. economy recovered. The company’s product mix is stabilizing as customers return to more normal operations.

Grainger’s High-Touch Solutions market continues to outpace the U.S. maintenance, repair and operating (MRO) market, supported by the continued traction of its growth initiatives. In the first quarter of 2022, this market exceeded the U.S. MRO market by 550 basis points (bps) from the prior year’s levels. For 2022, Grainger expects this market to grow between 14.9% and 15.5%, 300-400 bps above the estimated U.S. MRO market growth of 4-7%. Strategic activities such as building advantaged MRO solutions, delivering unparalleled customer service and offering differentiated sales and services will aid growth.

Grainger is focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities as well as executing improvement initiatives within the supply chain. The company continues to develop online capabilities that promote a personalized, relevant, effortless experience for each customer through Grainger.com, eProcurement connections, 1 solutions and mobile applications.

Higher operating costs in response to the COVID-19 pandemic and related activities are likely to impact operating margins in the upcoming quarters. Additionally, Grainger is witnessing product shortages and delays as overseas freight remain under pressure due to port congestion, container challenges and increasing fuel prices.  These factors are driving costs higher and the company expects these costs to remain elevated throughout the year. Higher material and freight costs will hurt margins in the second quarter. Supply-chain challenges are expected to persist in the current year due to pandemic-related shutdowns in Shanghai and China.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Graphic Packaging Holding Company (GPK - Free Report) , Myers Industries (MYE - Free Report) and Packaging Corporation of America (PKG - Free Report) .  While GPK and MYE flaunt a Zacks Rank #1 (Strong Buy), PKG carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Graphic Packaging has an estimated earnings growth rate of 86.8% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 7.6%.

Graphic Packaging pulled off a trailing four-quarter earnings surprise of 7.2%, on average. The company’s shares have appreciated 14.8% in a year.

Myers Industries has an expected earnings growth rate of 67% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 27% in the past 60 days.

MYE has a trailing four-quarter earnings surprise of 20.1%, on average. Myers Industries’ shares have gained 13% in the past year.

Packaging Corporation has an expected earnings growth rate of 16.2% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 4.2% in the past 60 days.

PKG has a trailing four-quarter earnings surprise of 19.6%, on average. Packaging Corporation’s shares have gained 4% in the past year.