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Reasons to Hold Grainger (GWW) in Your Portfolio for Now

Zacks Equity Research

W.W. Grainger, Inc. GWW is likely to gain on upbeat outlook, momentum in the United States and recovery in the Canadian business. Investments in digital capabilities and focus on strengthening customer base will also drive growth.

The company has a Zacks Rank #3 (Hold) and a VGM Score of A. Here, V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, 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.

Factors Favoring Grainger

Upbeat Outlook: For 2019, Grainger anticipates earnings per share in the band of $17.10-$18.70, reflecting year-over-year growth of 2-12%. Earnings growth is likely to be driven by operating performance and favorable tax rates.

Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $17.66 for 2019, reflecting year-over-year growth of 5.75%. For 2020, the Zacks Consensus Estimate for earnings is pegged at $19.17, exhibiting year-over-year improvement of 8.51%.

Price Performance: The stock has gained 4.9% over the past three months against the  industry’s decline of 4.8%.

Positive Earnings Surprise History: The company’s earnings have outpaced the Zacks Consensus Estimate in three of the trailing four quarters, the average positive surprise being 4.41%.

Growth Drivers
Strong Momentum in the United States:  Grainger generates revenues from the distribution of MRO (Maintenance, Repair and Operating) supplies, products and related services. In the United States, business investments and exports are two major indicators of MRO spending. Business investments are likely to remain strong in 2019, supported by expanding global markets, lower capital costs and an improving regulatory environment. Grainger is well positioned to benefit from efforts to strengthen relationships with customers in the United States.

Growth in E-Commerce:  Grainger is focused on improving end-to-end customer experience by making investments in e-commerce and digital capabilities, and implementing improvement initiatives within supply chain. Notably, the company intends to continue reducing cost base.

Turnaround in the Canada Business:   The company has been focused on reducing its cost structure in the Canada operations to drive profitable growth. Grainger has been managing inventory effectively to drive profitability, and is focused on making incremental investments in marketing and merchandising. Grainger’s Canada business has attractive prospects and is expected to deliver double-digit operating margin growth over the next five years.

Return on Assets: Grainger currently has a Return on Assets (ROA) of 16.4%, while the industry recorded ROA of 11.5%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

A Few Headwinds to Counter

Grainger’s results are likely to bear the brunt of input cost inflation and foreign exchange headwinds. The company is also facing higher freight costs. Further, it expects higher operating expenses, as the company is investing in digital marketing capabilities. Though these actions will yield long-term benefits for the company, it will hinder its margin performance in the near term.

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

A few better-ranked stocks in the Industrial Products sector are Unifirst Corporation UNF, Albany International Corporation AIN and Avery Dennison Corporation AVY. While Unifirst flaunts a Zacks Rank #1, Albany International and Avery Dennison carry a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Unifirst has a projected earnings growth rate of 15.17% for the current year. The stock has gained 8.5% in a year’s time.

Albany International has an estimated earnings growth rate of 32.3% for 2019. The company’s shares have been up 8.3% in the past year.

Avery Dennison has an expected earnings growth rate of 8.42% for the ongoing year. The stock has appreciated 7% over the past year.

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