FAST Fastenal Company

W.W. Grainger Inc (GWW) is slated to announce its second quarter 2011 results on July 19, 2011. The current Zacks Consensus Estimate is $2.11 for the relevant quarter, projecting a year-over-year growth of 28.04%.

With respect to earnings surprise, over the trailing four quarters, Grainger has consistently outperformed the respective Zacks Consensus Estimates. The average earnings surprise was 11.92%, implying that Grainger has outpaced the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Recap

Grainger’s fiscal first-quarter EPS jumped 58% from last year to a record $2.18, way ahead of the Zacks Consensus Estimate of $1.79. The impressive results were driven by expanding product lines, providing new services complementing Grainger’s products, investments in eCommerce and enhancement of sales force. These efforts have helped to gain market share in North America as well as penetration in the high growth, emerging markets.

Revenues in the quarter were $1,883.6 million, a rise of 12.6% from $1,672.3 million in the year-ago period and above the Zacks Consensus of $1,837 million. On a daily basis, sales increased 11% in the quarter with January, February and March posting increases of 10%, 11% and 12%, respectively.

Monthly Sales Performance Post First Quarter Results

Daily sales during April increased 14% compared with the same period last year. Excluding a 1% contribution each from acquisitions and foreign exchange, organic sales improved 12%. May sales growth of 11% was a deceleration from the 14% growth in the month of April. Excluding the impacts of acquisitions and foreign currency exchange rates, organic sales during the month increased 8%.

Looking Forward

Based on the upbeat first-quarter results, Grainger upped its fiscal 2011 guidance. The company now expects sales growth in the range of 7% to 10% compared with the prior guidance range of 5% to 9%. The company forecasts fiscal 2011 EPS to range between $8.10 and $8.60 in place of its prior expected range of $7.15 to $7.90.

Estimate Revision Trend  

For the second quarter, 4 of the 15 analysts covering Grainger have raised their estimates over the past 30 days. Only 1 analyst has raised the estimate over the past 7 days.

Magnitude of Estimate Revisions  

Over the past 90 days, earnings estimate for the second quarter climbed 14 cents to $2.08. Over the past 30 days, earnings estimate for the second quarter of fiscal 2011 inched up a cent to $2.09. Finally, over the past 7 days, the estimate for the quarter further scaled up 2 cents to $2.11.

Our Take

Grainger remains focused on expanding its product offering and growing the share of its private label products. It launched a multi-year product line expansion program in 2006 and has since added approximately 234,000 new products. Grainger has a long-term vision to expand the count to 500,000 products. The continued success of this program is expected to drive sales growth in 2011 and beyond. 

Its balance sheet remains strong and, given its cash position, we believe the company can further invest in growth opportunities, increase dividends and reinvest capital through share repurchases.

On the flipside, we are disappointed with the slowdown in its recent monthly sales. Grainger’s May sales growth of 11% dropped from the 14% rise in April sales. May was the first month in 2011 to face tougher year-over-year comparisons emanating from elevated sales, related to the Gulf of Mexico oil spill, in 2010. We are thus anticipating moderation in sales growth in the upcoming quarter as well as the year, with comparisons getting tougher.

Further, we expect some moderation in gross margin expansion over the balance of the year due to a large customer mix and modest price erosion. Also, the 360-basis point operating margin expansion witnessed in the first quarter is unlikely to recur in the remainder of the year due to several headwinds -- tougher sales comparisons due to the Gulf of Mexico oil spill starting in the second quarter, increased investment spending, moderation in gross margin expansion, not having any more additional selling days versus the prior year as in the first quarter and expenses from SAP in Canada.

Further, Grainger’s recent sales reflect a weakening in its government end markets, which account for 20% of its sales. Considering the government’s financially constrained position and tight budgets, we believe this segment will continue to be a drag on revenues in the coming year as well.

We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

A Quick Look at Peers

Fastenal Co. (FAST) recently reported second quarter EPS of 32 cents, up 39% from 23 cents a year ago and a penny ahead of the Zacks Consensus Estimate of 31 cents. Net sales for the quarter totaled $701.7 million, up 23% year over year, beating the Zacks Consensus Estimate of $699 million. The increase in sales was due to aggressive store openings and an increase in the company’s non-residential customers, accounting for 20%–25% of sales historically. Grainger’s other competitors – Applied Industrial Technologies Inc. (AIT) and WESCO International Inc. (WCC) – are yet to declare their second quarter results.

Illinois-based Grainger 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. The company’s services comprise inventory management and energy efficiency solutions.

 
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