W.W. Grainger, Inc. (GWW Quick QuoteGWW - Free Report) is likely to gain from growth in e-commerce sales, digital capabilities and solid business investment in United States despite the impact of tariffs and foreign exchange headwinds.

 

The company also outpaced the Zacks Consensus Estimate in the trailing four quarters. This resulted in average positive earnings surprise of 19.72%. The company has an estimated long-term earnings growth rate of 12.40%.

 

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

 

 

Strong Q3 Upbeat Outlook: Grainger’s third-quarter 2018 adjusted earnings per share of $4.19 improved 44% year over year and beat the Zacks Consensus Estimate of $3.96.

 

Grainger’s 2018 earnings per share guidance is pegged at $15.05-$16.05, reflecting year-over-year growth of 36% at the mid-point. The company anticipates earnings at the higher end of the guidance. The bottom line will also gain from the lower tax rate. As a result of the U.S. tax reform and the tax benefit from stock-based compensation, Grainger anticipates an adjusted tax rate of 23% to 26% for the year. It also projects reporting a positive operating margin run rate in 2018.

 

Positive Estimate Revisions, Growth Projections: The Zacks Consensus for fiscal 2018 and 2019 has gone up 2% and 1%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings is currently pegged at $16.30 for fiscal 2018, reflecting year-over-year growth of 42%. For fiscal 2019, the Zacks Consensus Estimate for earnings is pegged at $17.92, highlighting year-over-year growth of 10%.

 

Price Performance: The stock has gained around 35% over the past year, against the industry’s decline of 12%.

 

 

 

Rising Business Investment: Grainger generates revenues from the distribution of MRO (Maintenance, Repair and Operating) supplies and products and related services. In the United States, business investment and exports are two major indicators of MRO spending. Business investment is likely to remain strong in 2018, supported by expanding global markets, lower capital costs and an improving regulatory environment. Further, exports and business non-residential investment are anticipated to improve.

 

Growth in E-commerce: Grainger’s e-commerce sales, represents around 50% of its total sales continues to improve. The increase can primarily be attributed to the launch of Grainger.com and other electronic purchasing platforms in the United States, and across all single channel online businesses. The company is focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities, and implementing continuous improvement initiatives within its supply chain. Notably, it intends to continue reducing cost base.

 

Turnaround in the Canada Business: In Canada business, the execution of Grainger’s turnaround continues to make progress and is on track. The company is focused on improving gross margin and reducing cost structure in the Canada operations. The company expects to record a profitable run rate in 2018 for the business.

 

Favorable Rank, Score Combination: Grainger 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, 2 or 3 make solid investment choices.

 

Further, the company has a return on equity — a profitability measure — of 45.2%, better than the industry average of 36.6%. This reflects the company’s efficiency in utilizing its shareholders’ funds.

 

 

The company’s results will bear the brunt of tariffs and foreign exchange headwinds. Further, Grainger expects inflationary expenses this year and the next as the company invests in digital marketing capabilities. Though these actions will yield long-term benefits for Grainger, it will hinder the company’s margin performance in the near term.

  

 

Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.

 

 

Some better-ranked stocks in the same sector are Enersys (ENS Quick QuoteENS - Free Report) , CECO Environmental Corp. and Northwest Pipe Company (NWPX Quick QuoteNWPX - Free Report) , all three carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 20% in a year’s time.

 

CECO has a long-term earnings growth rate of 15%. The stock has surged 63% over the past year.

 

Northwest Pipe has a long-term earnings growth rate of 10%. The stock has gained 28% over the past year.

 

 

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