Bookmark and Share

Is W.W. Grainger Fairly Priced?

W.W. Grainger (NYSE:GWW) is a large cap stock with a market capitalization of $10.1 billion. The company is a distributor of maintenance, repair and operating (MRO) supplies and other related products and services.

GWW is located to the industrial equipment wholesale industry. The biggest competitors are Fastenal (NYSE: FAST), HD Supply Holdings (NYSE: HDS) and MSC Industrial Direct (NYSE: MSM).

Over the past year, the GWW stock is down 26.41%, which is a clear underperformance compared to the S&P 500 and Dow Jones. Each of the larger indices gained during the same period over 10%.



Is it now a good time to buy, not to buy, wait or sell the stock? In this article, I will check the financials and valuation figures of the company and give a clear statement.

I developed a simple system to diagnose the financial health of a company. It looks at the following six key metrics...


- Profitability (+)

The profitability of GWW is good. The net profit margin of GWW amounts to 5.8% compared to 4.64% of the industry average.



- Debt Situation (-)

I use the debt-to-equity ratio as qualified measure to evaluate the debt situation. The debt-to-equity ratio for the W.W. Grainger stock amounted to 1.28. Compared to an industry ratio of 1.08, the industrial wholesale company seems to be working with a higher leverage, which is in general bad due to a higher risk.

- Dividend Yield (+)

The dividend yield of W.W. Grainger is currently 3.01%. The industry average offers a ratio of just 2.29%. GWW beats the industry.



- P/E Ratio (+)

The current price-to-earnings ratio of GWW amounts to 17.39. Compared to the industry figures, which are valuated with an average ratio of 20.75, W.W. Grainger looks cheaper than other companies in the industry. This impression is also intact when we look at the forward P/E ratios.



- Capital Returns (+)

Capital returns are important for investors. Two most important ratios to evaluate the capital efficiency of a company are the return on equity and the return on investment.



For both ratios, the GWW stock has better values than the industry average.

- Sales and EPS Growth (-)

Sales and earnings growth figures are also very important for investors. Quarter over Quarter, W.W. Grainger is losing market share with a sales growth of just 1.4% compared to an industry average value of 2.75%.
Earnings per share decreased Q/Q by 1.7% which is also a worse sign.



W.W. Grainger passes four of my six key metrics for the moment. Similar to my investment rating scheme, GWW receives a Buy Rating from me.

Rating
# Metrics
Strong Buy
5 +
Buy
4 +
Hold Positive
3 +
Hold Negative
2 +
Sell
1 +

One reason for the strong underperformance of the stock is Amazon. Each retail and wholesale company feels the pain of Amazon's momentum gaining online business.

The big online retailer attacks more and more industries. Due to the fact that a big part of GWW's business could be eliminated by Amazon, investors stay away from the company.

But traditional retailers don't sleep. For sure, they have underestimated the power of the internet and drag behind Amazon's online success. Now Amazon is eating their business.

Traditional retailer building online sales channels

Traditional retailers have missed a first chance for selling their stuff online but they recover lost ground. 

What I see is a massive effort into online sales channels. Assuredly, they are not as much attractive as the Amazon website for the time being but they are growing and developing their online business.

With Gamut, Grainger is the 10th largest eCommerce retailer in North America (Source: Standard IR Presentation W.W. Grainger as of June 7, 2017; Page 10). In addition, W.W. Grainer has Zoro and MonotaRO as online distributor for small clients. Both should contribute nearly $2 billion in combined sales by the end of 2019.

In my view, there is a big opportunity for traditional retailers to gain from new market developments. At the moment, they are fighting against Amazon and trying to defeat their current sales.

3 comments:

  1. While I do not want to question the criteria you utilize to evaluate the value of any given stock it would boost your credibility if you used the proper name of the company whose stock is being evaluated. W.W. Grainger NOT Grainer. I have been a customer of this company for decades and your oversight runs against my grain. :-)

    ReplyDelete
  2. There is a Fastenal down the road from me. I wonder how they compare. Thanks for sharing, the stats do look favorable as long as they can increase sales and catch up to AMZ.

    ReplyDelete
  3. The book running lead managers to the offer are JM Financial Institutional Securities Limited, Axis Capital Limited, BNP Paribas, Citigroup Global Markets India Private Limited, Deutsche Equities India Private Limited, ICICI Securities Limited, Kotak Mahindra Capital Company Limited and SBI Capital Markets Limited.
    Value pick
    multibagger

    ReplyDelete

Do you have any questions or notes to this article?
Please let me know your thoughts and we will discuss it.