Grainger Rallies 10% Since Q3: Will the Momentum Continue?

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Shares of W.W. Grainger, Inc. GWW have rallied 10% since its third-quarter 2018 earnings release. In the quarter, the company recorded year-over-year growth in earnings and revenues.

Notably, Grainger has outperformed the industry with respect to price performance over the past year. The stock has gained around 46% compared with 19% growth registered by its industry.

Let's delve deep and analyze the reasons behind the company's impressive price performance and find out if there is room for further appreciation.

Growth Drivers

Grainger's e-commerce sales, which represented around 54% of total sales in the third quarter, increased 18% year over year. Sales were primarily buoyed by the launch of Grainger.com and other electronic purchasing platforms in the United States, and across all single-channel online businesses. The company is focused on improving end-to-end customer experience by making investments in its e-commerce and digital capabilities, and executing continued improvement initiatives within the supply chain.

Grainger will continue its efforts to strengthen relationships with both large- and mid-sized customers. The company has been witnessing rising volumes across all customer groups. Volume and the number of transactions per customer have been increasing and the company is also witnessing increased traffic in all branches. Grainger continues to re-engage lapsed customers and acquire new ones.

Grainger's earnings will also benefit from the lower tax rate. As a result of the U.S. tax reform and the tax benefit from stock-based compensation, the company expects an adjusted tax rate of 23-26% for the year. It also expects to post a positive operating margin run rate in 2018.

Hurdles to Overcome

With respect to tariffs, Grainger has deployed a cross-functional task force to evaluate the impact of tariffs, as well as execute mitigating actions. The company is working with suppliers to minimize the cost impact, including identifying alternative supply and evaluating pricing actions.

Nonetheless, approximately half of the products sourced from China have been impacted by 301 tariffs. Due to the tariffs, the company estimates that its cost will increase by about 2% for the U.S. segment in 2018. Further, Grainger's results will be impacted by foreign-exchange headwind, inflationary expenses and fluctuation in oil prices .

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.

Zacks Rank & Key Picks

Grainger carries a Zacks Rank #3 (Hold), currently.

Better-ranked stocks in the same industry include Enersys ENS , CECO Environmental Corp. CECE and Rexnord Corp. RXN . While Enersys flaunts a Zacks Rank #1 (Strong Buy), CECO and Rexnord carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 22%, over the past year.

CECO has a long-term earnings growth rate of 15%. The company's shares have surged 45%, in the past year.

Rexnord has a long-term earnings growth rate of 16.4%. The stock has gained 14% in a year's time.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: RXN , CECE , ENS , GWW

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