Grainger Falls on Dismal 2014 Outlook

Zacks

Shares of W.W. Grainger, Inc. (GWW) dipped 1.21% to close at $265 on Nov 13, as the leading broad line supplier of maintenance, repair and operating (MRO) products announced lower-than-expected 2014 earnings guidance at its analyst meeting.

Grainger initiated guidance for the fourth quarter of 2013. Sales are projected to grow 6% to 8% year over year in the quarter. Compared to fourth quarter 2012 revenues of $2.2 billion, this translates to revenues of $2.36 to $2.40 billion. Earnings per share are expected to range between $2.53 and $2.73 for the quarter.  This reflects a 5% to 13% increase from year-ago quarter’s earnings of $2.42 a share. The current Zacks Consensus Estimate is within the guided range as revenues are pegged at $2.38 billion and earnings are projected to be $2.67 a share. Based on our estimates, revenues and earnings per share are expected to improve 7% and 10% year over year, respectively.

Grainger reiterated its fiscal 2013 guidance of revenue growth in the range of 5% to 6%. This translates to revenues of $9.4 billion to $9.5 billion for the current fiscal compared to base revenues of $8.5 billion in fiscal 2012. Earnings are forecasted between $11.45 and $11.65 a share for fiscal 2013, reflecting an annual growth of 10% to 12%. The Zacks Consensus Estimate for 2013 revenues are pegged at $9.46 billion and earnings per share at $11.57, depicting 6% and 11% annual growth, respectively.

For 2014, the company initiated guidance with sales growth projected between 6% to 10% and earnings per share in the band of $12.25 to $13.00. The earnings guidance is however below the current Zacks Consensus Estimate of $13.18, which reflects 14% annual growth.

Grainger also provided an update on its longer-term financial objectives. By 2019, operating margins are targeted to be in the range of 16% to 17%. This is expected to be driven by organic sales growth in high-single digits and operating margin expansion of approximately 30 to 60 basis points per year.

The company expects long-term benefits from its sustained focus on expanding sales force, product offerings and strengthening businesses across all operating regions, particularly Asia and Latin America. The company will continue to invest in e-commerce -- its most profitable channel. For 2013, eCommerce sales are projected at $2.3 billion and Grainger’s target is to increase the share of eCommerce sales to 50% of total sales by 2015.

Furthermore, Grainger’s sound balance sheet, low debt level and cash flow allow the company to hike dividends and reinvest capital through share repurchases as well as invest in acquisitions and growth opportunities. Grainger’s acquisition of E&R Industrial Sales, Inc. in August this year will extend Grainger's capabilities in serving customers in the manufacturing space.

However, the recent slowdown in sales is a point of concern. Furthermore, incremental growth will weigh on margins in the short term. Sequestration remains a headwind for the federal government business, particularly in the Military business.

Lake Forest, Ill-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.

Grainger currently carries a short-term Zacks Rank #4 (Sell). Favorable options in the industry include  Xylem Inc. (XYL), with a Zacks Rank #1 (Strong Buy) and Graham Corp. (GHM) and Hudson Technologies Inc. (HDSN), both holding a Zacks Rank #2 (Buy).

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