A month has gone by since the last earnings report for W.W. Grainger (GWW). Shares have lost about 11.2% 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 Q4 Earnings Lag Estimates, Revenues Beat
Grainger reported fourth-quarter 2019 adjusted earnings per share (EPS) of $3.88, down 2% year over year primarily owing to a higher tax rate in the reported quarter. The bottom line also missed the Zacks Consensus Estimate of $4.03, resulting in a negative surprise of 4%.
Including one-time items, such as restructuring and other charges, earnings came in at $1.88 in the reported quarter. The figure plunged 49% from the year-ago quarter’s $3.68.
Grainger’s revenues jumped 3% to $2,847 million from the prior-year quarter figure of $2,763 million. This upside was driven by an increase of 3.5 percentage point (pp) in volume and unfavorable price impact of 0.5%. The top line surpassed the Zacks Consensus Estimate of $2,845 million.
Operational Update
Adjusted cost of sales increased 4% year over year to $1,766 million. Gross profit was up 1.5% year over year to $1,081 million. Gross margin contracted 38.0% in the quarter from 38.5% in the year-ago quarter.
Grainger’s adjusted operating income in the fourth quarter dipped 1% to $307 million from the $310 million in the prior-year quarter. Adjusted operating margin contracted 40 bps year over year to 10.8% in the quarter.
Financial Position
The company had cash and cash equivalents of $360 million at the end of 2019, down from $538 million at 2018 end. Cash provided by operating activities decreased to $1,042 million in the fourth quarter from the year-ago quarter figure of $1,057 million.
Long-term debt was $1,914 million as of Dec 31, 2019, compared with $2,090 million as of Dec 31, 2018. The company returned $1,028 million to shareholders through $328 million in dividends and $700 million to buy back around 2.4 million shares in 2019.
2019 Results
Grainger reported adjusted earnings per share of $17.29 in 2019, up 4% from the prior-year reported figure of $16.70. However, earnings missed the Zacks Consensus Estimate of $17.46. Including one-time items, the bottom line came in at $15.32, up 12% from $13.73 reported in 2018.
Sales rose 2.4% year over year to around $11.5 billion from the prior-year figure of $11.2 billion. The top line came in line with the Zacks Consensus Estimate.
Outlook
Grainger initiated guidance for full-year 2020. Operating margin is forecasted in the band of 11.7-12.5%. The company expects EPS of $17.75-$19.25. The mid-point of the guidance range indicates year-over-year growth of 7% from 2018. Gross margin is estimated between 37.2% and 37.8%, and revenue growth is projected between 3.5% and 6.5%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
VGM Scores
At this time, W.W. Grainger has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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
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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