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Grainger (GWW) Q4 Earnings: Another Beat in the Offing?

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W.W. Grainger, Inc. (GWW - Free Report) is expected to report fourth-quarter 2018 results on Jan 24, before the opening bell.
 
Grainger surpassed the Zacks Consensus Estimate in the trailing four quarters, recording average positive surprise of 19.72%. In the last reported quarter, the company’s adjusted earnings per share improved 44% year over year to $4.19, beating the Zacks Consensus Estimate by a margin of around 6%. Stellar sales, operating expense leverage and a lower tax rate drove Grainger’s improved third-quarter performance.
 
W.W. Grainger, Inc. Price and EPS Surprise
 
W.W. Grainger, Inc. Price and EPS Surprise

W.W. Grainger, Inc. price-eps-surprise | W.W. Grainger, Inc. Quote

Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Grainger is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.
 
Earnings ESP: The Earnings ESP for Grainger is +1.61%. This is because the Most Accurate Estimate of $3.66 is pegged higher than the Zacks Consensus Estimate of $3.60. A favorable Earnings ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks Rank: Grainger currently carries a Zacks Rank #3.
 
Conversely, stocks with a Zacks Rank #4 or 5 (Sell rated) should never be considered going into an earnings announcement.
 
Factors to Influence Q4 Results
 
Grainger generates revenues from the distribution of MRO (Maintenance, Repair and Overhaul) 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 solid in 2018, supported by expanding global markets, lower capital costs and an improving regulatory environment. The Zacks Consensus Estimate for Grainger’s quarterly sales in the Unites States is $2.1 billion, reflecting a year-over-year rise of 6%. The Zacks Consensus Estimate for adjusted operating income of the segment is pegged at $301 million for the to-be-reported quarter compared with $299 million recorded in the prior-year quarter. Further, the company’s efforts to strengthen relationships with both large- and mid-sized U.S. customers by executing high-value sales and service model remain catalysts for the segment’s performance.
 
In the fourth quarter, Grainger is poised to gain from its focus on digital marketing. The company continues to witness improvement in digital and off-line marketing mainly buoyed by Grainger.com and other electronic purchasing platforms in the United States and across all single channel online businesses. The company remains focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities, and executing continued improvement initiatives within the supply chain. Notably, Grainger’s e-commerce sales, which represent more than 50% of its total sales, increased 23% year over year in the third quarter of 2018.
 
Grainger’s margin performance will be impacted by rising expenses owing to investments in digital marketing capabilities. Moreover, the company’s margins will be dented as its suppliers resorted to price hikes to combat the effect of tariffs. The company is working with suppliers to minimize the cost impact, including identifying alternative supply; and evaluating pricing actions. Earnings will benefit from the lower tax rate as a result of the U.S. tax reform.
 
Grainger is focused on improving gross margin and reducing the cost structure in Canada as increased expenses have been plaguing this segment. Further, the company’s oil and gas, and energy exposure in the nation is very high. Per the Zacks Consensus Estimates, net sales in the Canada segment are likely to drop around 19% to $154 million in the to-be-reported quarter. The segment will also likely report an adjusted operating loss of $1 million, narrower than the operating loss of $4 million reported in fourth-quarter 2017.
 
The Zacks Consensus Estimate for Grainger’s earnings per share is pegged at $3.60 for the fourth quarter, reflecting year-over-year growth of 22.5%. The Zacks Consensus Estimate for total sales is pegged at $2.79 billion, indicating an increase of nearly 6% from the prior-year quarter.
 
Share Price Performance
 
 
Shares of the company have appreciated around 32% over the past year, outperforming growth of 8% recorded by the industry.
 
Other Stocks to Consider
 
Here are a few other stocks worth considering as these too have the right combination of elements to post an earnings beat this quarter.
 
Heritage-Crystal Clean, Inc. (HCCI - Free Report) has an Earnings ESP of +1.12% and a Zacks Rank #2. The company’s shares have been up 12% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Cintas Corporation (CTAS - Free Report) has an Earnings ESP of +4.87% and a Zacks Rank #2. The stock has gained 12% in a year’s time.
 
HD Supply Holdings, Inc. (HDS - Free Report) has an Earnings ESP of +4.87% and a Zacks Rank #2. Its shares have gained 3% in the past year.
 
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