Grainger Retained at Neutral - Analyst Blog
June 26 2013 - 3:00PM
Zacks
On Jun 25, we maintained our
Neutral recommendation on distributor of facilities maintenance,
repair and operating supplies, W.W. Grainger Inc.
(GWW), based on expectations of growth opportunities through
product and geographic expansion and e-commerce; partially offset
by the recent slowdown in sales, weakness in government-end market
and impending pressure on margins.
Why Reiterated?
Grainger reported first-quarter 2013 earnings of $2.94 per share,
up 14% year over year from $2.57 and ahead of the Zacks Consensus
Estimate of $2.73. Total revenue was $2.28 billion, up 4% from
$2.19 billion in the year-ago period. However, revenues missed the
Zacks Consensus Estimate of $2.3 million.
Grainger increased its EPS guidance in the range of $11.30-$12.00
per share for fiscal 2013, up from the prior guidance of
$10.85-$12.00 per share. However, Grainger increased its sales
growth guidance to a range of 5% to 9%, up from prior projection of
3% to 9%.
We appreciate Grainger’s focus on expanding its product offerings
as well as gaining traction for its private label products.
Grainger expects to increase its product count from the current
413,000 to 500,000 products by 2015. The company has historically
seen annual growth of approximately 2% on sales from products added
through the program.
The company continues to expand its businesses across its operating
regions, mainly in Asia and Latin America. Grainger also continues
to invest in e-commerce, as it is reportedly growing two fold
compared to other channels and is deemed to be the company’s most
profitable channel. In 2012, e-commerce sales represented 30% of
the total company sales. Grainger’s target is to increase it up to
50% by 2015. This channel also carries higher margins as it
requires lower selling, general and administrative costs.
On the flipside, Grainger's overall sales growth continued to show
a downward trend. In 2012, after enjoying a double-digit run till
August, sales growth has remained in the single digits before
plunging to the lowest level of 2% in December. In the first
quarter of 2013, even though sales growth recovered to 8% in Jan,
it again dipped to 6% in Feb and 3% in March.
So far in the second quarter, Grainger’s sales growth recouped to
8% in April, but again dipped lower to 5% in May. June daily sales
growth is reportedly similar to May. Sales in Canada slowed
considerably because of weaker demand for exports and extended road
closures due to unfavorable weather. Management expects the
negative effects to continue in June as well.
Grainger has increased its investment spending for 2013 to $160
million from the previous projection of $135 million. Even though
these initiatives will lead to additional share gains in the
future, it will weigh on margins in the short term.
Other Stocks to Consider
Grainger retains a short-term Zacks Rank #3 (Hold). Other
industrial product makers with favorable Zacks Rank are
Graco Inc. (GGG), with a Zacks Rank #1 (Strong
Buy), and Hudson Technologies Inc. (HDSN) and
MSC Industrial Direct Co. Inc.
(MSM) with a Zacks Rank #2(Buy).
GRACO INC (GGG): Free Stock Analysis Report
GRAINGER W W (GWW): Free Stock Analysis Report
HUDSON TECHNOLO (HDSN): Free Stock Analysis Report
MSC INDL DIRECT (MSM): Free Stock Analysis Report
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