W.W. Grainger GWW is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services. It is one of the prominent players in the industrial services industry in the United States. Though the stock has dipped 2.6% in the past year, the company has potential to grow in the near term. It should be on investors’ watchlist, backed by its ongoing investments in growth initiatives, rising e-commerce sales and relentless focus on strengthening customer base.
The company carries a Zacks Rank #3 (Hold) and 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, make solid investment choices.
Let's delve deeper and analyze the factors influencing the stock.
Grainger expects earnings per share for 2020 between $17.75 and $19.25. The mid-point of the guidance range indicates year-over-year growth of 7% from 2019. Revenue growth is projected between 3.5% and 6.5% driven by outperformance to the market in the United States, and continued expansion of endless assortment business. Grainger expects endless assortment business to improve around 20% in 2020.
W.W. Grainger, Inc. Price and Consensus
The Zacks Consensus Estimate for the current year’s earnings is currently pegged at $18.59, suggesting growth of 7.5% from the prior-year quarter. The estimate for sales is at $12 billion, reflecting an improvement of 4.5% from 2019.
Strong Customer Relationship to Boost Growth
The company accomplished the goal of remerchandising a record $1.2 billion of products in the United States and is on track to complete another $1.6 billion in 2020. Aided by its ongoing investments in growth initiatives, Grainger expanded the U.S MRO market by 150-200 basis points in 2019 and the trend is likely to sustain in 2020 as well.
In the fourth quarter, the grew 3% or 350 basis points faster than the market while the U.S. improved 5% or approximately 550 basis points faster than the market. Growth in the U.S. large customer business and midsize customer business continues to grow despite sluggish market conditions. The company anticipates the segment to outpace the MRO market, which includes a target of 300-400 basis points annual outgrowth in the United States. Grainger will continue its efforts to strengthen relationships with both large and mid-sized customers to improve sales force effectiveness. Grainger continues to re-engage lapsed customers and acquire new ones.
Efforts to Turnaround Canada Business to Reap Benefits
Grainger’s Canada business is an attractive market and is expected to deliver double-digit operating margin growth over the next five years. The company has been focused on reducing cost structure in the Canada operations to drive profitable growth. Grainger has been managing inventory effectively to drive profitability, and is focused on making incremental investments in marketing and merchandising. Through 2019, revenues have stabilized and customer feedback has improved significantly. It expects to return to growth in the business in the back half of 2020, and anticipates business to be sustainable and profitable in the future.
Investment in Digital Capabilities & E-commerce to be Catalysts
Grainger continues to expect strong cash flow generation for 2020 and plans to invest the cash in its distribution network, digital platform, and IT infrastructure. The company will also continue to return cash to shareholders through share repurchase and dividends. Meanwhile, capital expenditures are projected at about $250 million. The major portion of the investment will be on the U.S. segment and endless assortment business in order to drive growth in these areas.
Grainger’s e-commerce sales continue to grow. The company is focused on improving the end-to-end customer experience by making investments in e-commerce and digital capabilities, and executing improvement initiatives within its supply chain. Notably, it intends to continue to reduce the cost base. The company’s single-channel businesses, primarily MonotaRO and Zoro, continued to drive profitable growth. The company expects to drive growth with endless assortment model through the strength of the MonotaRO and the incremental investments in Zoro.
Return on Assets
Grainger currently has a Return on Assets (ROA) of 16.0%, while the industry recorded ROA of 11.2%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Sharps Compliance Corp SMED and Graco Inc. GGG. All of these stocks sport a Zacks Rank #1, at present. You can see the complete list of today's Zacks #1 Rank stocks here.
Northwest Pipe has an expected earnings growth rate of 19.5% for the current year. The stock has appreciated 34% over the past year.
Sharps Compliance has an estimated earnings growth rate of a whopping 767% for the ongoing year. In a year’s time, the company’s shares have gained 39%.
Graco has a projected earnings growth rate of 4.3% for 2020. The company’s shares have rallied 19% over the past year.
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