W.W. Grainger Inc. (GWW) 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 (EPS) increased 35% year over year to $2.34
from $1.73 in 2010.
Reported earnings in the quarter included a benefit of 12 cents
per share related to the settlement of tax examinations related to
2007 and 2008, compared with the benefit of 8 cents per share from
changes to the company's paid time off policy realized in the
prior-year quarter.
Excluding the special items, EPS in the reported quarter stood
at $2.22, versus $1.65 in the comparable quarter last year. It also
exceeded the Zacks Consensus Estimate of $2.11 per share.
Revenues in the quarter were $2.0 billion, up 12.3% from $1.78
billion in the year-ago period, which was higher than the Zacks
Consensus Estimate of $1.97 billion. 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 attributed to volume growth and
favorable pricing coupled with favorable foreign exchange rates and
acquisitions, partly offset by negative impacts from the oil spill
cleanup in the Gulf of Mexico in 2010.
Operating earnings in the quarter improved 23% to $265.3 million
from $214.9 million last year, primarily driven by higher gross
profit margins. Gross profit rose 15.4% to $862.4 million from
$747.1 million a year ago.
Segment
Performance
Revenues from the United States segment
increased 9% year over year to $1,625.8 million, driven by
favorable volume and price growth, partially offset by negative
impacts from the oil spill in the Gulf. On a daily basis, sales
increased 10% in April, followed by 8% growth in both May and
June.
Operating income for the segment shot up 17% to $270.6 million,
mainly due to higher sales and improved gross profit margins from
the region.
Revenues from the Acklands-Grainger business in
Canada climbed 24% to $256.9 million, which was
attributable to the improvements in the oil and gas, heavy
manufacturing, retail/wholesale, and agriculture and mining
customer end-markets. On a daily basis, sales in the segment
increased 16% in April, 15% in May and 17% in June (in local
currency).
Operating income in Canada expanded significantly to $29.3
million as a result of strong sales and improvement in gross
margins and operating expenses.
Revenues from the Other businesses (which
include Japan, Mexico, India, Puerto Rico, China and Panama) were
up 49% year over year to $135.6 million, based on strong growth in
Japanese, Mexican and Colombian businesses.
Operating earnings also rose significantly to $8.6 million as
compared with $1.9 million in the year-ago quarter, primarily
driven by strong earnings growth in Japan and Mexico, coupled with
lower operating losses in China.
Financial Position
Grainger had cash and cash equivalents of 465.7 million and
long-term debt of $200.5 million, as of June 30, 2011. That
compares with a cash balance of $388.1 million and long-term debt
of $412.7 million, as of June 30, 2010.
The company generated net cash from operating activities of
$309.5 million in the first six months of the year, up from $286.3
million in the year-ago period. Capital expenditures for the
quarter were $52 million versus $14 million in the prior-year
period. Grainger did not repurchase any shares in the quarter
although it has approximately 7.7 million shares remaining under
its current repurchase authorization. However, the company paid
total dividends of $47 million during the quarter.
Outlook
Grainger increased both its sales and earnings estimates for the
full year. The company now expects sales growth in the range of 9%
to 10% compared with the prior guidance range of 7% to 10%. The
company forecasts fiscal 2011 EPS between $8.40 and $8.70 versus
its prior expected range of $8.10 to $8.60.
Our Take
Grainger remains focused on expanding its product offering as
well as its private label products. The company introduced a
multi-year product line expansion program in 2006. Since then, the
company has launched approximately 234,000 new products. Grainger
expects to roll out almost 500,000 products over a number of years.
The continued success of this program is expected to drive sales
growth in 2011 and beyond.
The company’s balance sheet remains strong and, given its strong
cash position, we believe the company will further invest in growth
opportunities, increase dividends and reinvest capital through
share repurchases.
However, Grainger’s recent sales reflect a weakening government
end market, which account for 20% of its sales. Considering the
financially constrained position of the government and tight
budgets, we believe this issue will continue to be an overhang on
revenues going forward. Another concern is the seasonal pattern of
its gross margins.
Furthermore, increasing competition in the industry may also
restrict its progress and the desired business growth. The
company’s key competitors include TMS International
Corp. (TMS), Harsco Corporation (HSC) and
ScanSource, Inc. (SCSC).
Thus, keeping these in mind, shares of W.W. Grainger are
maintaining a Zacks #3 Rank, which translates into a short-term
Hold rating. The stock also has a Neutral recommendation for the
long term.
GRAINGER W W (GWW): Free Stock Analysis Report
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SCANSOURCE INC (SCSC): Free Stock Analysis Report
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