Grainger is latest to fall
By Industrial Distribution Staff -- Industrial Distribution, 9/1/1999
It seems like every month there's a stock hitting the skids in the distribution sector. The recent list includes names like MSC Industrial and SunSource. Now, add W.W. Grainger to the list.In July, Grainger announced second-quarter diluted earnings per share of 53 cents, down 10.6 percent from the 60 cents reported in the comparable quarter last year, and below Wall Street's 63 cents expectation. Temporary challenges associated with the installation of Grainger's new information technology platform accounted for seven cents of the shortfall, with the remainder largely attributable to weak seasonal product sales.
The company further indicated incremental spending in 1999 on information technology related projects will total approximately $25-30 million, more than double the previous estimate of $10-12 million. With about 45 more branches and five distribution centers to convert to new systems, this project could continue into early 2000. Therefore, analysts reduced their earnings per share expectations, with consensus estimates declining from $2.59 to $2.32 for 1999. For 2000, consensus EPS were also reduced from $2.92 to $2.69. The stock price has since retreated 25.1 percent from $57 on July 14, to $45 9/16 at press time.
We are encouraging investors to patiently monitor the progress of Grainger's IT initiatives, as recent stock price weakness may lead to an attractive entry point into stock.
From a historical perspective, Grainger has a number of strengths, including its position as the largest North American distributor of MRO supplies; a solid history of growth, with a 1988-1998 compound annual growth rate in EPS of 9.6 percent; an extensive distribution network of over 500 branches; a deep and broad product offering; diverse channel strategies; a strong balance sheet; and healthy internally generated cash flow.
Jeffrey Germanotta is senior vice president of equity research at R.W. Baird & Co. He can be reached at (414) 765-3572, or e-mailed at jgermanotta@rwbaird.com
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