Grainger Earnings: We’re Still Modeling in Near-Term Resilience, Despite Some End Markets Cooling

Grainger’s GWW second-quarter results led us to increase our fair value estimate to $476 from $473 previously. The increase was driven by slight tweaks to our near-term sales and margin forecast, in addition to the time value of money since our last update. The company’s high-touch business continues to perform well, outgrowing the U.S. maintenance, repair, and operations market by 525 basis points in the quarter. Recall, management’s outperformance target is 400-500 basis points.

Endless assortment continues to see slowing demand from small- to medium-sized businesses, but the company maintained that large industrials continue to perform well. This speaks to the fact that some industrial end markets remain resilient, despite some spots of cooling. Most of the activity challenges are coming from consumer-facing markets. That said, we’re expecting nearly 8% consolidated sales growth in 2023 for Grainger.

On valuation, we’re still maintaining our overvalued assessment, given the cyclical nature of Grainger’s end markets. We think the market is projecting the company’s recent performance strength into midcycle. The high-touch business posted a strong operating margin of 16.3% in 2022, meeting the company’s 2025 targets ahead of schedule. Grainger experienced strong growth across multiple end markets like mining, heavy manufacturing, and transportation, to name a few.

The outperformance in high-touch even propelled Grainger to also meet its long-term consolidated operating margin target of 14.5% in 2022. The strength in high-touch more than outweighed the 100-basis-point operating margin decline in endless assortment. However, industrial and manufacturing activity is softening, which we think could make it difficult for Grainger to maintain its current level of profitability in the coming years. We think it’s reasonable to project moderating profitability into midcycle as opposed to continued strengthening from current levels.