Buy W.W. Grainger (NYSE:GWW) On Post-Earnings Weakness

W.W. Grainger Is An Unsung Pandemic Winner

W.W. Grainger (NYSE:GWW) may not have the positioning of Tractor Supply Company (NASDAQ:TSCO) or the name recognition of Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) but it should not be overlooked. The company advertises as a retailer/wholesaler of maintenance, repair and operating equipment but is really a hardware store for business, industry and tradesmen. If there is a tool, piece of equipment, supply, or a part you need to make your business go Grainger is where you can get it. The company just reported 3rd quarter earnings and knocked the ball right out of the park. Not only is business rebounding but growth is back in the picture.

W.W. Grainger Beats Consensus, Resumes Buyback Plans

W.W. Grainger was not totally immune to the pandemic but it did weather the storm well. The shutdowns caused a low-single-digit decline in 2nd quarter earnings that was reversed in the 3rd. The 3rd quarter revenue came in at $3.02 billion or 2.4% better than last year. The top-line figure is also better than consensus by 1.3% and driven by a 4.6% increase in organic sales. The company noted strength in the U.S. market and Endless Assortment segments of the business.

W.W. Grainger was able to control costs and leverage the business rebound over the quarter. Although gross margin fell the decline was offset by an increase in both reported and adjusted operating margins. Gross margins fell 170 basis points due to COVID-related headwinds and product mix while operating margins increased 110 basis points (reported) and 90 basis points (adjusted).

The bottom-line results are the most impressive. The company churned out $4.41 in GAAP and $4.52 in adjusted earnings for a net 10% in growth from last year. Operating cash flow fell a bit but that is not a worry, the difference is tied up in inventory purchased to serve demand. Looking to the next quarter, the $4.12 of consensus earnings per share expected for the 4th quarter is probably light. Even so, when added to the YTD total, it is enough to smash right through the full-year consensus. As for next year, it looks like Grainger should see earnings continue to grow at a double-digit or near-enough pace.

W.W. Grainger Is A Near-Dividend King

W.W. Grainger is a Near-Dividend King with 49 years of consecutive annual distribution increases, the most recent was just last quarter. At today’s prices, the stock is yielding about 1.65% or roughly in-line with the broad market average. The upshot is that this payout is supremely safe in that the payout ratio is low, the company has ample free cash flow, a fortress balance sheet, and nearly $30 per share in cash. That’s almost two years of earnings. There is some debt to consider but not enough to hamper operating. As for debt-service, the coverage ratio is near 14X expense and thenext major maturity isn’t until after 2025. FYI, the cash hoard is going to start coming down, or at least stop getting bigger, because the company is going to resume its buyback program this quarter.

The Technical Outlook: A Buying Opportunity In W.W. Grainger

Shares of W.W. Grainger fell hard after the 2Q report, maybe because the results wern’t good enough. Regardless, price action has the stock down to a near-one month low where buying has become evident. The bulls haven’t unleashed a massive rebound but they are confirming the $355 level as a point of interest. The indicators are bearish so prices may remain under pressure in the near-term. If price action falls below the $355 level a deeper correction, possibly to the $340 level, is likely.