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W.W. Grainger (GWW) Down 7.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for W.W. Grainger (GWW). Shares have lost about 7.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is W.W. Grainger due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Grainger Earnings Trump, Sales Trail Estimates in Q1

Grainger posted first-quarter 2019 adjusted earnings per share (EPS) of $4.51, up 8% year over year. Further, earnings beat the Zacks Consensus Estimate of $4.42 by 2%. Growth in operating earnings and lower average shares outstanding drove Grainger’s quarterly performance.

Including one-time items, such as restructuring and other charges, earnings came in at $4.48 in the reported quarter. The figure improved 10% from $4.07 recorded in the year-ago quarter.

Grainger reported revenues of $2,799 million, up 1.2% from the prior-year quarter’s figure of $2,766 million. This upside was driven by an increase of 3 percentage point (pp) in volume and 1.5 pp increase in price. However, revenues missed the Zacks Consensus Estimate of $2,891 million.

Operational Update

Adjusted cost of sales increased 1.7% year over year to $1,703 million. Adjusted gross profit inched up to $1,096 million from $1,092 million recorded in the year-earlier quarter. Adjusted gross profit margin was 39.2% compared to the 39.5% reported in the year-ago quarter.

Grainger’s adjusted operating income in the first quarter increased 6.4% to $365 million from $343 million witnessed in the prior-year quarter. Adjusted operating margin expanded 65 bps to 13% in the quarter from 12.4% in the year-earlier quarter.

Financial Position

The company had cash and cash equivalents of $392 million at the end of first-quarter 2019 compared with $538 million at the end of 2018. Cash provided by operating activities fell to $127 million for the quarter compared with $147 million reported in the prior-year quarter.

Long-term debt was $2,077 million as of Mar 31, 2019, compared with $2,090 million as of Dec 31, 2018. The company returned $211 million to shareholders through $76 million in dividends and $135 million to buy back around 457,000 shares in the first quarter.

Outlook

In the Jan-Mar quarter, Grainger maintained its guidance for full-year 2019. Net sales growth is expected in the range of 4-8.5% and operating margin is forecast in the band of 12.2. The company expects EPS in the band of $17.10-$18.70. Gross margin is estimated between 38.1% and 38.7%. The company also estimates capex in the range of $300-$350 million.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, W.W. Grainger has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, W.W. Grainger has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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