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First Look: Grainger

Grainger (GWW) is the leading supplier for maintenance supplies in North America, with a 6% share of the US market, 8% in Canada and 1% in Mexico. The company sells motors, power transmission products, test instruments, lab supplies, power tools, outdoor equipment, and janitorial supplies.

GWW is also a great stock for conservative investors. The company has increased its dividend for 44 consecutive years and the stock has a yield of 2%. Profits have grown in nine of the past ten years, with the only down year being 2009 when the country was in a recession. Management uses profits wisely, to buy back stock, invest in technology (it’s websites are gai ning traction) and purchase other supply stores. The estimated long-term profit growth rate is 11% and if you tack on the yield of 2% you get an estimated total return of 13% per year.

Ten Year Chart

GWW_2015_Q3_10yr

The negative is GWW is on a downward trend as it is having troubles with sales growth. The US accounts for 78% of revenue and had sales growth of just 2% last qtr, as did Canada its second biggest market. Overall, profits increased a modest 6% last qtr on just a 1% rise in sales.

GWW’s profit estimates have decreased in five consecutive qtrs, and that’s why the stock’s on a downward trend.  Still, the stock is finding support around the $225 level.

Profit History

GWW_2015_Q3_PHIn recent years, this stock has gotten a bit ahead of itself. Through much of the last decade GWW sold for around 17x earnings. But in 2013-2014 the median P/E was greater than 20. I feel this stock deserves a P/E of 19. Grainger provides investors with a high degree of safety, a healthy growing dividend, and possibly 10% earnings growth over the long-term. Management expects flat to 2% sales growth this year. Profit growth was in the single digits the past three qtrs.

Sharek’s Take

Grainger is a great long-term holding for conservative accounts or for investors in retirement. The company gets Value Line’s top ranking of 1 for safety and pays a 2% dividend. The negative (and its a big one) is profit growth is rather lackluster at this point and thus the stock is on a downward trend. I feel this is a value stock right now in a period where growth is in. I would recommend investors take a small position in this stock, but the tide might not turn Grainger’s way until 2016.

View the One Year Chart here.
View the Earnings Table here.

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