W.W. Grainger, Inc. (GWW - Free Report) is likely to gain from upbeat outlook, growth in e-commerce sales and digital capabilities despite the input cost inflation and foreign exchange headwinds.
The company has outpaced the Zacks Consensus Estimate in the trailing four quarters. This resulted in average positive earnings surprise of 13.5%. The company has an estimated long-term earnings growth rate of 12.1%.
Below, we briefly analyze the company's potential growth drivers and possible headwinds.
Factors Favoring Grainger
Strong Q4 Upbeat Outlook: Grainger’s fourth-quarter 2018 adjusted earnings per share of $3.96 improved 35% year over year and beat the Zacks Consensus Estimate of $3.60.
Grainger’s 2019 earnings per share are expected in the range of $17.10-$18.70, reflecting year-over-year growth of 2-12%. The bottom line will be driven by operating performance and favorable tax rates. Grainger expects net sales growth of 4-8.5% year over year to $11.7-$12.2 billion in 2019. Gross margin is estimated between 38.1% and 38.7%. Operating margin is projected at 12.2-13.0%, showing a 20-100 basis point expansion from 2018. The company expects tax rate between 24.5% and 27.5%.
Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $17.88 for fiscal 2019, reflecting year-over-year growth of 7.1%. For fiscal 2020, the Zacks Consensus Estimate for earnings is pegged at $19.97, highlighting year-over-year growth of 11.7%.
Price Performance: The stock has gained around 18.0% over the past year, outperforming the industry’s gain of 11.5%.
Growth Drivers in Place
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 2019, supported by expanding global markets, lower capital costs and an improving regulatory environment.
Growth in E-commerce: Grainger’s e-commerce sales continue to grow. The company is focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities, and implementing improvement initiatives within its supply chain. Notably, it intends to continue reducing cost base. The company has combined its Gamut and grainger.com capabilities, and has made incremental investments in digital marketing.
Turnaround in the Canada Business: The company has been focused on improving margins and reducing its cost structure in Canada operations to drive profitable growth. Grainger expects the segment to deliver operating margin of 1-5% in 2019. The company also realized $45 million in savings related to its turnaround efforts.
Strong Momentum in the United States: The company expects revenues in the United States segment to grow 300-400 basis points faster than the market, with expected market growth of approximately 1-4%. Grainger projects operating margin at the segment in the range of 15.5-16.1% for 2019. The company will benefit from efforts to strengthen relationships with customers in the United States. Volume and the number of transactions per customer are rising and the company is also witnessing increasing traffic across all branches. Grainger continues to re-engage lapsed customers and acquire new ones.
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 37.3%. This reflects the company’s efficiency in utilizing its shareholders’ funds.
Few Headwinds to Counter
The company’s results will bear the brunt of input cost inflation and foreign exchange headwinds. The company is also facing higher freight costs. Further, Grainger expects higher operating expenses 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.
W.W. Grainger, Inc. Price and Consensus
Stocks to Consider
A few better-ranked stocks in the Industrial Products sector are Axon Enterprise, Inc (AAXN - Free Report) , Alarm.com Holdings, Inc. (ALRM - Free Report) and Ennis, Inc. (EBF - Free Report) each sporting Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
Axon has an expected earnings growth rate of 14.5% for 2019. The company’s shares have rallied 90.9% in the past year.
Alarm.com has an expected earnings growth rate of 7.8% for 2019. The stock has climbed 74.3% in a year’s time.
Ennis has an expected earnings growth rate of 13.9% for 2019. Its shares have gained 2.3% in the past year.
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