On Nov 28, 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 third-quarter 2014 earnings per share of $3.30, up 12% year over year, driven by strong volume growth and positive operating leverage in the U.S. business.
Given its performance so far in the year, Grainger reduced the top end of its $12.20–$12.60 earnings per share (EPS) guidance for fiscal 2014, which now stands in the range of $12.20—$12.30. The company now projects sales growth of 5—5.5%, lower than the previous expectation of 5—7% growth. This marks the third consecutive quarter in which Grainger has cut down its guidance. The original projection was of 6—10% growth in sales.
Grainger’s business in Canada continues to face a sluggish macroeconomic environment and unfavorable currency exchange. The country’s economy experienced pressure in the first nine months of 2014 as the Canadian dollar weakened to new four-year lows. The weak Canadian dollar along with a 3% drop in the commodity price index for metals and minerals from Sep 2013 to Sep 2014, have impacted the performance of the Canadian business, which is heavily dependent on the natural resources sector.
These market factors led to declines in the agriculture and mining sectors of the Canadian business for the nine months of 2014. Even though sales has improved sequentially in the third quarter in Canada, currency headwinds and increased investments in supply chain and IT will continue to weigh on margins going forward. In addition, the recent plunge in oil prices will affect the segment’s results.
Nevertheless, Grainger is focused on expanding its product offerings, sales force and the share of its private label products, which will lead to long-term growth. Acquisitions also remain a key growth driver.
We believe Grainger is poised benefit from its new strategy in key international markets. Grainger announced the exit of its business in Brazil which was incurring losses. In Europe, it is going to restructure Fabory and launch a single channel Zoro model, replicating its earlier success. The company will cut down 10—15% of costs at Fabory through branch rationalization and internal efficiencies over the next six to twelve months. Fabory is expected to breakeven in 2015 and post profit thereafter in 2016. Grainger considers Europe as an attractive market considering its size, economic maturity and market dynamics.
Grainger also continues to invest in e-commerce and expects increment in the number of customers utilizing this channel as well as its percentage of overall sales. Grainger crossed the $3 billion mark in e-commerce sales in 2013, representing 33% of the company’s total sales, and now targets 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 the company’s most profitable channel.
Grainger currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some better performing stocks that are worth considering within this sector include Blount International Inc. (BLT), The Babcock & Wilcox Company (BWC) and Barnes Group Inc. (B). While Blount International sports a Zacks Rank #1 (Strong Buy), The Babcock & Wilcox Company and Barnes Group carry a Zacks Rank #2 (Buy).
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