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Here's Why You Should Hold Grainger Stock in Your Portfolio Now

Zacks Equity Research

W.W. Grainger, Inc. GWW is likely to gain on investments in growth initiatives, rising e-commerce sales and relentless focus on strengthening the customer base.

The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, make solid investment choices.

Let’s delve deeper and analyze the company's potential growth drivers and possible headwinds.

Price Performance: The stock has gained 16.4% over the past year, as against the industry’s loss of 3.7%.

Return on Assets: Grainger currently has a Return on Assets (ROA) of 14.8%, while the industry recorded ROA of 10.9%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

Growth Drivers

The company accomplished the goal of remerchandising a record $1.2 billion of products in the United States and is on track to complete another $1.6 billion in 2020. Aided by its investments in growth initiatives, Grainger expanded the U.S MRO market by 150-200 basis points (bps) in 2019 and the trend is likely to sustain in the current year as well.

In first-quarter 2020, Grainger outgrew the U.S MRO market by around 700 bps. Even after excluding the contribution of the pandemic-related sales, the outgrowth was within the company’s targeted range of 300-400 bps annual outgrowth, highlighting the continued traction of its growth initiatives. Grainger will continue its efforts to strengthen relationships with both large- and mid-sized customers to improve sales-force effectiveness. It continues to re-engage lapsed customers and acquire new ones.

The company has witnessed a surge of COVID-19 pandemic-related product sales, such as personal protective equipment (PPE) and safety products, owing to higher customer demand. Grainger expects increased levels of safety and cleaning product sales to large healthcare, government and critical manufacturing customers in the near term. Further, the pandemic has provided a boost to Grainger’s e-commerce sales. The company is focused on improving the end-to-end customer experience by making investments in its e-commerce and digital capabilities, and executing improvement initiatives within its supply chain. Furthermore, the company has undertaken several cost-control measures in the wake of the uncertainty related to the pandemic.

Grainger’s Canada business is an attractive market and is anticipated to deliver double-digit operating margin growth over the next five years. The company has been focused on reducing cost structure in the Canada operations to drive growth and is focused on making incremental investments in marketing and merchandising. It expects to return to growth in the business in the second half of 2020, and anticipates the business to be sustainable and profitable.

A Few Headwinds to Counter

The coronavirus pandemic might cause disruptions to Grainger’s businesses and operations as well as the operations of its customers and suppliers. Further, the pandemic has led to a shift in demand toward lower-margin products. Higher operating costs in response to the pandemic and related activities are also likely to hurt operating margins in the upcoming quarters.

Weakness in heavy manufacturing will keep hurting Grainger’s top line. Moreover, its Canada business has a heavy exposure to natural resource customer base, and hence, low oil prices might affect the segment. Also, the company’s performance will likely be thwarted by the input cost inflation and foreign-exchange headwinds.

Bottom Line

At present, investors might want to hold on to the stock, as it has ample prospects to outperform peers in the near future.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. SLGN, Broadwind Energy, Inc. BWEN and Energous Corporation WATT. While Silgan sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Energous carry a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 15% in the past three months.

Broadwind Energy has an expected earnings growth rate of 174% for the current year. The stock has appreciated 6% over the past three months.

Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 37% in three months’ time.

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