Grainger Upgraded to Hold On Modest Improvement in Sales

Zacks

On Jun 26, 2014, Zacks Investment Research upgraded W.W. Grainger, Inc. (GWW) to a Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell). The upgrade came on the back of the modest improvement in sales and expected benefits from sales initiatives. However, weakness in sales in Canada remains a concern.

Why the Upgrade

The leading broad line supplier of maintenance, repair and operating (MRO) products reported a 6% year-over-year increase in sales in May 2014. The growth has exceeded the prior-month increase of 5% and is also up from the growth rate of 5% achieved in May last year.

The increase in May 2014 sales stemmed from positive contribution from acquisitions (2 percentage points), partly offset by a 1 percentage point decline due to foreign currency fluctuations primarily related to the weakness in the Canadian dollar. On an organic basis, sales improved 5% on volume growth (6 percentage points), partially offset by a decline of 1 percentage point from lower sales of seasonal products.

Geographically, daily sales in the U.S. rose 8%, aided by higher volume (7 percentage points) and acquisitions (2 percentage points), and offset by a decline of 1 percentage point from lower sales of seasonal products.

Overall sales have grown from the slow start at the beginning of the year due to an inclement weather. The United States has delivered the highest growth of 8% so far in 2014. Even though Canada continued to be in the red, the rate of decline has meandered to single digit from the double-digit dip reported in the previous months.

Grainger’s business in Canada continues to face a sluggish macroeconomic environment and unfavorable currency exchange. The weakness in the Canadian economy is due to lower commodity prices and a reduction of Canadian exports.

According to Grainger, daily sales growth in June is trending in line with May. June will have 21 selling days, one more than last year.
Grainger, in its first-quarter earnings call, 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 remains focused on expanding its product offerings, sales force as well as shares of its private label products. The company recently announced the purchase of 96 acres of land in Bordentown Township, NJ. It plans to build a 1.3 million square-foot distribution center, scheduled to open in 2016, Grainger also continues to grow through acquisitions. In addition, Grainger’s sound balance sheet, low debt level and cash flow allow it to further invest in growth opportunities, raise dividends and reinvest capital through share repurchases.

We expect Grainger to perform in line with its peers in the coming months and advice investors to wait for a better entry point before accumulating shares.

Other Stocks to Consider

Grainger currently has a Zacks Rank #3 (Hold). Some better performing stocks in the industry include Harsco Corporation (HSC), Gorman-Rupp Co. (GRC) and Graco Inc. (GGG). While Harsco sports a Zacks Rank #1 (Strong Buy), Gorman-Rupp and Graco hold a Zacks Rank #2 (Buy).

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