It’s Almost Time To Stock Up On Grainger

Grainger Is A Rebound Story Waiting To Happen

Grainger (NYSE:GWW) is not a pandemic winner. It did not see its revenue surge by double-digits or its growth accelerate. Grainger is one of those lucky companies that was not only able to weather the storm and emerge stronger. It is also a company in the perfect position for the economic rebound and acceleration we see building for 2021. The question that Grainger investor's need answered is when the  rebound in revenue growth will really start and there was little indication of it in the Q4 report.

The element that hurt Grainger in 2020 was business spending. With business and industry shut down across North America and now operating under tight conditions, there was less demand for certain categories of Grainger products. The element that helped Grainger is the pandemic itself. The pandemic spurred a need for other of Grainger’s products, products that can be labeled PPE, sanitation, and decontamination, all saw an increase in demand that did little more than offset areas of weakness. The good news is that, with vaccine use spreading and the outlook for 2021 brightening, Grainger can expect an uptick in demand for the entire line.

Grainger Falls On Mixed Quarter

Grainger had a steady if not solid quarter in the fiscal fourth quarter with net revenue rising 3.3% from last year. The $2.94 billion in reported income beat the consensus by $0.02 billion or 70 basis points and would have been better if not for two factors. Excluding the impact of FX and divestitures initiated in the wake of the pandemic, the company’s organic revenue grew 5.6%. The company reports strength in the U.S. and Endless Assortment segments and weakness in Canada.

Moving down the report the company’s operating margin increased by 300 basis points to 9.4% but is offset by a 70 basis point decline in adjusted margin. This resulted in earnings of $275 million, $295 adjusted, which both missed the consensus by fairly wide margins. The GAAP $3.12 missed by $0.75 while the adjusted $3.66 missed by a smaller $0.20.

The company failed to give any guidance for the coming year but did issue a favorable statement. While COVID conditions are expected to persist a slow and steady increase in demand is expected to persist through the end of the year. The analyst are not so cautious, they are expecting a consensus 4% increase in revenue to generate at least 12% in EPS growth. Regardless, the company generated an 8% increase in cash flow for the year that it is using to leverage growth and give value to shareholders.

Grainger Gives Value To Shareholders

Grainger is not shy about returning capital to shareholders. Along with the $197 million in CAPEX spending the company did in 2020 it bought back shares and paid dividends in the amount of $939 million. Total share buybacks were just over $600 million and expected to continue in 2021, as are dividend increases. The company pays $6.12 per share for a yield of 1.65%and has a long history of past increases. The company is only a year away from earning its crown as a Dividend King and that increase is expected in the first half of the year. Based on the 37% payout ratio and outlook for earnings this company could continue increasing for many years.

The Technical Outlook: Grainger Is Moving Lower

Shares of Grainger are moving lower on the weak results but that will set up another buying opportunity in a great stock. The Q4 release has shares down about 3.5% in early trading and setting a new low. The indicators are equally bearish and suggest more downside is possible if not likely. With shares at a new low the next target for support is near the $345 level where it has bounced before. If this level doesn’t confirm as support (or a higher one) then price action may fall to $340 and then possibly $320. Longer-term, this stock should begin to rebound once there are clearer indications of demand picking up and that may possibly come with the Q1 report.