We reiterate our Neutral recommendation on W.W. Grainger Inc. (GWW), which is a leading North American distributor of material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components; and services comprising inventory management and energy efficiency solutions.
Grainger released its financial results for the 2011 second quarter on July 19, 2011. The company reported net earnings of $170 million in the second quarter of 2011, up 32% from $129 million in the year-ago quarter. Earnings per share increased 35% year over year to $2.34 from $1.73 in 2010.
However, excluding some special items, EPS in the reported quarter stood at $2.22, versus $1.65 in the comparable quarter last year.
Revenues in the quarter were $2.0 billion, up 12.3% from $1.78 billion in the year-ago period. On a daily basis, sales increased 14% year over year in April, 11% year over year in May and 12% year over year in June.
The improvement in revenue was attributable to volume growth and favorable pricing coupled with favorable foreign exchange rates and acquisitions, partly offset by negative impacts from the oil spill clean-up in the Gulf of Mexico in 2010.
Grainger also focuses on expansion programs to strengthen its businesses in each of its operating regions, mainly in Asia and Latin America. Revenue from the Other Businesses increased 49% year over year in the second quarter, reflecting strong growth in Japan and Mexico. Grainger Colombia SAS, a joint venture formed in June 2010 with THF International SAS, also significantly contributed to the same.
Recently, the Canadian arm of Grainger acquired the assets of Baie-Comeau industrial distributor Fercomat Inc. to broaden its footprint in Canada. Grainger also completed the acquisition of Fabory Group, a leading European distributor of fasteners and related maintenance, repair and overhaul (MRO) products to mark the company’s entry into the world's largest MRO market.
In addition, Grainger remains focused on expanding its product offerings and growing the share of its private label products. The company’s catalog, issued in February 2011, offers around 350,000 products in areas such as plumbing, fasteners, material handling and security products. The company has a long-term vision to expand the count to 500,000 products from 350,000 products planned for 2011.
However, Grainger’s strong international presence makes it highly vulnerable to exchange rate fluctuations. Foreign exchange contributed 2% to the 12% sales growth in the last reported quarter. However, the company is still exposed to negative currency impacts given the fragile and unstable global economy.
Moreover, Grainger’s recent sales reflect a weakening trend in its government end-markets. Given the government’s financially constrained position and tight budgets, this segment will continue to be a drag on revenues in the coming year as well.
Taking all these into account, W.W. Grainger holds a Zacks #3 Rank in the short term, which translates into a “Hold” rating.
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