Why Hold Strategy is Apt for Grainger (GWW) Stock Right Now
W.W. Grainger, Inc. GWW is likely to gain on an upbeat outlook, momentum in the United States and a solid Canadian business. Investments in digital capabilities and focus on strengthening customer base will also drive growth.
The company carries a Zacks Rank #3 (Hold) and 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.
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 $17.48 for 2019, reflecting year-over-year growth of 4.67%. For 2020, the Zacks Consensus Estimate for earnings is pegged at $18.86, exhibiting a year-over-year improvement of 7.91%.
Price Performance: The stock has gained 16.6% over the past three months, outperforming the industry’s growth of 6.7%.
Positive Earnings Surprise History: The company’s earnings have outpaced the Zacks Consensus Estimate in two of the trailing four quarters, the average positive surprise being 1.94%.
Grainger is focused on improving end-to-end customer experience by making investments in e-commerce and digital capabilities, and implementing improvement initiatives within its supply chain. Notably, the company intends to continue reducing its cost base. Further, the company anticipates to drive growth with the endless assortment model on MonotaRO and incremental investments in its Zoro businesses.
Grainger is well positioned to benefit from efforts to strengthen relationships with customers in the United States. Grainger has been focused on reducing its cost structure in the Canada operations to fuel growth. Its Canada business has attractive prospects and is expected to register double-digit operating margin growth over the next five years. Moreover, Grainger has been managing its inventory effectively to drive profitability, and is focused on making incremental investments in marketing and merchandising.
Return on Assets: Grainger currently has a Return on Assets (ROA) of 16.3%, while the industry recorded ROA of 11.2%. 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 to incur higher operating expenses, as the company is rapidly investing in fortifying its digital-marketing capabilities. Though these actions will yield long-term benefits for the company, the same will dampen its margin performance in the near term.
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
W.W. Grainger, Inc. Price and Consensus
Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1, at present. You can see the complete list of today's Zacks #1 Rank stocks here.
Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 46% over the past year.
Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 25%, so far this year.
Sharps Compliance has an outstanding estimated earnings growth rate of 500% for the ongoing year. Year to date, the company’s shares have gained 26%.
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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.