Grainger Risk-Reward Balanced - Analyst Blog

On May 9, 2014, we issued an updated research report on W.W. Grainger Inc. GWW. This leading broad line supplier of maintenance, repair and operating MRO products reported first-quarter 2014 earnings per share of $3.07, up 4% from $2.94 per share in the year-ago quarter and ahead of the Zacks Consensus Estimate of $2.97. Growth in the United States and online sales helped offset weakness in Canada.

Grainger maintained its earnings per share guidance in the range of $12.10–$12.85 per share for fiscal 2014. Its sales growth guidance is expected to range between 5% and 9%. Grainger is expecting minimal gross margin expansion compared with 2013 due to lower gross margins from the acquired businesses. Full-year operating margin expansion of 10 to 40 basis points is expected, reflecting a negative mix from the acquisitions.

Grainger's business in Canada continues to face a sluggish macroeconomic environment and an unfavorable currency exchange. The weakness in the Canadian economy is being driven by lower commodity prices and a reduction in Canadian exports. Sales in the first quarter of 2014 decreased 10% and were down 2% in local currency. Operating earnings decreased 35% driven by sales decline, lower gross margins and negative expense leverage.

Grainger has taken a cautious approach to growth and infrastructure spending in the first quarter of 2014 due to softer-than-expected sales growth in the first two months of the quarter. Given the pacing of projects and lower-than-expected spending in the first quarter, the company is anticipating full-year incremental growth spending of approximately $115 million. This is down from the previous guidance of $130 million and the actual spending of $132 million in 2013.

Nevertheless, Grainger remains focused on expanding its product offerings, sales force as well as the share of its private label products which will lead to long-term growth. In the United States, Grainger added 180 new sales representatives and over 300,000 new products in 2013, bringing the total number of online products to more than 1.2 million. In Canada, Grainger announced the addition of 200,000 products to its online offering.

Grainger also continues to invest in e-commerce and expects to increase the number of customers utilizing this channel and its percentage of overall sales. Grainger crossed the $3 billion mark in e-commerce sales in 2013, representing 33% of total company sales. Grainger's target is to increase it to 50% by 2015. E-commerce is one of Grainger's most efficient channels as it is reportedly growing twice as fast as other channels and is deemed to be Grainger's most profitable channel.

Grainger currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some stocks that are worth considering within this sector include Gorman-Rupp Co. GRC, Altra Industrial Motion Corp. AIMC and The Babcock & Wilcox Co. BWC. While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), Altra Industrial and Babcock & Wilcox Company carry a Zacks Rank #2 (Buy).