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W.W. Grainger (GWW) Research Report: Q1 CY2024 Update


Full Report / May 23, 2024

Maintenance and repair supplier W.W. Grainger (NYSE:GWW) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 3.5% year on year to $4.24 billion. Its non-GAAP profit of $9.62 per share was flat year on year.

W.W. Grainger (GWW) Q1 CY2024 Highlights:

  • Revenue: $4.24 billion vs analyst estimates of $4.26 billion (small miss)
  • EPS (non-GAAP): $9.62 vs analyst expectations of $9.63 (in line)
  • Gross Margin (GAAP): 39.4%, down from 39.9% in the same quarter last year
  • Free Cash Flow of $542 million, up 13.6% from the previous quarter
  • Organic Revenue rose 4.9% year on year
  • (14.5% in the same quarter last year)
  • Market Capitalization: $47.3 billion

Founded as a supplier of motors, W.W. Grainger (NYSE:GWW) provides maintenance, repair, and operating (MRO) supplies and services to businesses and institutions.

William W. Grainger started W.W. Grainger in 1927 to fill what the founder thought was a big market void. The company addressed demand for maintenance, repair, and operating (MRO) supplies such as motors, tools, and safety supplies such as eye protection, sold through a catalog. Instead of wasting time and resources buying different products from different retailers, a factory or industrial customer could rely on a one-stop-shop that was reliable and cost effective.

Today, Grainger offers an extensive range of MRO supplies and services, including safety products, material handling equipment, lighting solutions, and inventory management services. The company solves the problem of sourcing and procuring necessary MRO products by being a single supplier for businesses and institutions. For instance, Grainger helps manufacturing plants maintain operational efficiency by supplying spare parts and tools, while also offering safety equipment to ensure workplace compliance with regulations.

The primary revenue sources for Grainger come from the sale of these MRO products. The company's business model emphasizes direct sales. Historically, the company and industry peers distributed catalogs to customers, who would in turn call in their orders via telephone, and supplemented these catalogs with physical retail branches. Today, however, Grainger has an extensive online presence to meet more digitized customers where they are. Despite a shift from catalogs to e-commerce though, Grainger's value has always rested on its ability to offer a very broad selection of quality products that the company can get to customers in a timely manner so as not to disrupt factory or other operations.

Maintenance and Repair Distributors

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Competitors in the operating (MRO) supplies industry include Fastenal (NASDAQ:FAST), MSC Industrial Direct (NYSE:MSM), and HD Supply (NASDAQ:HDS).

Sales Growth

A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones demonstrate sustained growth over multiple years. W.W. Grainger's 8.1% annualized revenue growth over the last five years was decent. This shows W.W. Grainger was successful in expanding its business, a useful starting point for our quality assessment. W.W. Grainger Total Revenue

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. W.W. Grainger's annualized revenue growth of 10.6% over the last two years is above its five-year trend, suggesting its demand has recently accelerated.

W.W. Grainger also reports organic revenue, which strips out currency fluctuations and one-time events like acquisitions because they don't accurately reflect the demand for the company's offerings. Over the last two years, W.W. Grainger's organic revenue averaged 12.9% year-on-year growth. Because this number is better than its revenue growth, we can see that some mixture of foreign exchange rates and divestitures dampened its top-line performance. W.W. Grainger Year-On-Year Organic Revenue Growth

This quarter, W.W. Grainger grew its revenue by 3.5% year on year, and its $4.24 billion of revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 6.7% over the next 12 months, an acceleration from this quarter.

Gross Margin & Pricing Power

In the industrials sector, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

W.W. Grainger's unit economics are great compared to the broader industrials sector and signal it doesn’t sell a commodity but instead enjoys product differentiation through quality or brand. As you can see below, it's averaged an impressive 37.8% gross margin over the last five years. That means W.W. Grainger only had to pay its suppliers $62.17 for every $100 in revenue to provide its products and services.

W.W. Grainger Gross Margin

W.W. Grainger produced a 39.4% gross profit margin in Q1, in line with the same quarter last year. Zooming out, the company's margin has remained steady over the last 12 months, suggesting that W.W. Grainger's input costs are under control.

Operating Margin

W.W. Grainger has been an efficient company over the last five years. It demonstrated it can be one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.8%. This isn't surprising as its high gross margin gives it a favorable starting point for ultimate operating profitability.

Analyzing the trend in its profitability, W.W. Grainger's annual operating margin rose by 6.3 percentage points over the last five years, showing its efficiency has significantly improved.

W.W. Grainger Operating Margin (GAAP)

This quarter, W.W. Grainger generated an operating profit margin of 15.8%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

W.W. Grainger's EPS grew at a spectacular 16.6% compounded annual growth rate over the last five years, higher than its 8.1% annualized revenue growth. This tells us the business became more profitable as it expanded. W.W. Grainger EPS (Adjusted)

We can take an even deeper look into W.W. Grainger's earnings quality. As we mentioned earlier, W.W. Grainger's operating margin was flat this quarter but expanded by 6.3 percentage points over the last five years. On top of that, its share count shrank by 11.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For W.W. Grainger, its two-year annual EPS growth of 27.9% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, W.W. Grainger reported EPS at $9.62, in line with the same quarter last year. This print was close to analysts' estimates. Over the next 12 months, Wall Street expects W.W. Grainger to grow its earnings. Analysts are projecting its EPS of $36.66 in the last year to climb by 10.2% to $40.38.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

W.W. Grainger has shown strong cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin averaged 8% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that W.W. Grainger's margin expanded by 2.5 percentage points during that time. This is encouraging and shows it's heading in the right direction.

W.W. Grainger Free Cash Flow Margin

W.W. Grainger's free cash flow clocked in at $542 million in Q1, equivalent to a 12.8% margin. This quarter's result was good as its margin was 4.1 percentage points higher than in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause quarter-to-quarter swings in the short term.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was that growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

W.W. Grainger's five-year average ROIC was 32.6%, placing it among the best industrials companies. Just as you’d like your investment dollars to generate returns, W.W. Grainger's invested capital has produced excellent profits.

W.W. Grainger Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, W.W. Grainger's ROIC has risen. The company has historically shown the ability to generate good returns and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

W.W. Grainger reported $804 million of cash and $2.28 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $2.8 billion of EBITDA over the last 12 months, we view W.W. Grainger's 0.5x net-debt-to-EBITDA ratio as safe. We also see its $90 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from W.W. Grainger's Q1 Results

It was encouraging to see W.W. Grainger beat analysts' organic revenue expectations this quarter. On the other hand, its EPS missed and its revenue fell short of Wall Street's estimates. Overall, this was a mediocre quarter for W.W. Grainger. The stock is flat after reporting and currently trades at $958.30 per share.

Is Now The Time?

W.W. Grainger may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are several reasons why we think W.W. Grainger is a great business. For starters, its revenue growth has been decent over the last five years. On top of that, its operating margin expansion shows the business has become more efficient, and its stellar ROIC suggests it has been a well-run company historically.

W.W. Grainger's price-to-earnings ratio based on the next 12 months is 23.9x. Looking at the industrials landscape today, W.W. Grainger's qualities as one of the best businesses really stand out. Despite the higher valuation, we still like it at this price and believe it's a high-quality company worthy of an investment.

Wall Street analysts covering the company had a one-year price target of $948.98 right before these results (compared to the current share price of $958.30).

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