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.