Companies like W.W. Grainger (GWW) tend to do quite well in the early phases of an economic recovery. Not only do these companies have to replenish low inventories of components and supplies (worked down below normally desirable levels during a slowdown), but they actively begin expanding production again. The question, though, is what happens when that early cycle is over? Companies will continue to order from Grainger as this recovery moves into its next phase, but investor enthusiasm may transition on to the next flavor of the month.
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The Quarter That Was
Sales grew 19%, as reported in the third quarter, with the company's US business growing 13% (ex-acquisitions). Volume made up about 9% of that overall growth, with pricing more or less flat. Within the numbers, heavy and light manufacturing were the strongest sectors, while government, commercial, and contractor categories limped along at single-digit growth. A little more concerning, though, was the pattern of growth—every month of the third quarter was weaker on a year-over-year basis than the prior quarter. In other words, the company is still logging impressive double-digit growth, but the rate is slowing, and that will certainly perturb some momentum and growth investors.
Below the top line, the data was good, but a bit confusing. Grainger reports an above-average level of special items and accounting treatments. The company makes this as clear as it can, but it can be a bit confusing. All in all, though, operating earnings rose about 30% ex-items, while net earnings were up about 25%.
The Road Ahead
If Grainger disappointed with its forward guidance, it is because expectations were running hot going into this announcement. That said, the company is not likely to see another boost like the BP (BP) oil spill cleanup, and guidance does suggest that year-over-year growth will decelerate into the high single digits.
Likely as not, heavy manufacturing and light manufacturing are going to slow down, while it does not seem like contractor or government business will pick up strongly. Investors with an interest in Grainger's future should pay attention, then, to the earnings reports and guidance from manufacturing-related businesses like Caterpillar (CAT), Boeing (BA), and United Technologies (UTX), not because they are major Grainger customers per se, but because they should offer a "tell" on the heavy-duty manufacturing sector.
The Bottom Line
Grainger is no longer a cheap stock and the easy money is probably already in hand. That should not trouble long-term investors, but more momentum-oriented holders should realize that their ride is much closer to the end than it is the beginning.
By Stephen Simpson of KratistoInvesting.blogspot.com
