Grappling With Grainger (GWW)

 

 

 

W. W. Grainger (GWW) was this month’s Online Stock Study at the Better Investing website.  More than ever before, some 600 participants completed a SSG by consensus as Brian Altschul led the one hour discussion. Brian is a volunteer educator and a director at the New Jersey BI chapter.  Thanks Brian for a solid presentation.

 

The Power Point slides and completed SSG can be downloaded from the BI website and, several weeks after I wrote this, the recorded presentation also became available for downloading.

 

I’m a big fan of these monthly stock studies and the part I like best is learning the SSG methods of the different presenters.  The SSG involves five judgment calls and I especially like learning the 4 or 5 alternative choices for each judgment that the different presenters prepare for the participants.

 

Value Line says that Grainger is the leading provider of maintenance, repair, and operating supplies and services to businesses in the U.S. with almost 600 branches in all 50 states and 17 distribution centers. It sells to businesses and institutions, not retail to the general public.  Grainger’s 2007 catalog offered nearly 139,000 facility maintenance products and more than 300,000 are available online.  Its products range from janitorial and painting to pneumatics and hydraulics, from adhesives to test instruments.

 

Unlike most stocks last year, Grainger’s stock price fell only a small amount in 2008: – 6% for the last 12 months, – 5% for the last six, +7 for the last three, and + 12% for the last month.

 

Here is a comparison of the Consensus SSG with three others: by Take Stock, DannyM, and myself.  Take Stock is a one-click, computerized program at StockCentral.com that involves no judgment by the user.

 

Grainger, W.W. (GWW)	BI Online   Stock Study	Armin	DannyM	Take   Stock
Date	1-7-09	1-8-09	1-2-09	1-7-09
Data	S&P	same	Hemscott	same
Price	$78.81	$77.44	$80.59	$78.51
52 week High & Low Price	$93.99 & $58.86	same &   same	same &  same	n/a
Project     Growth From	Last Quarter   [see A]	Last Quarter	Last Quarter	Last Annual
Sales Growth	8.20%   [see B]	7.00%	4.00%	3.30%
EPS Growth	8.20%  (Preferred Procedure)        [see C]	7.00%         [see D]	10.00%	3.30% initial & 1.00% final                                  [see E]
High PE	20.0   [see F]	16.0	19.8	19.8
High EPS	$8.87	$8.39	$9.46	$5.20
High Price	$177.40 ($27/sh >       latest VL)	$134.20	$187.30 ($37/sh >    latest VL)	$103.02 ($17/sh <  latest VL)
Value Line Estimated High Price = $120-150 on 1-9-09 and $130-160 on 10-10-08
Low PE	13.7   [see G]	10.8	14.7	13.6
Low EPS	$5.98	$5.98	$4.94	$5.06
Low Price	$58.90 (recent severe low)	$58.90 (recent  severe low)	$58.90 (recent        severe low	$68.82
Upside/ Downside	4.9	3.1	4.9	2.5            (imputed)
Total Return	19.0%	13.3%	19.7%	7.3%
SSG Buy Under	n/a	$71.78	$90.97	$55.50
RV & PRV (no outliers)	75.4 &            69.6	73.7 &         69.2	79.7 &        72.6	n/a
Quality	n/a	S&P = A	Not Rated	TS = 3.2 unaccep-table
PTPM – 5 yr ave	09.5% trend up	same     [see H]	9.5% trend up   [see I]	same trend n/a
ROE – 5 yr ave End Equity	15.0% trend up	same        [see H]	15.1% trend up       [see I]	n/a
ROE – 5 yr ave Start Equity	n/a	16.1% trend up	16.2% trend up	same trend n/a
Debt to Equity –   5 yr ave	n/a	0.2% trend even	-0- trend even	n/a

 

 

[A] The Granger study used the Toolkit software, not the Online SSG at the BI website, and was therefore able to project future growth from the last quarter which the Online SSG does not allow.

 

I like the monthly Online Stock Studies, but dislike the Online SSG because it has substantial limitations.  See my prior critique, Assessing Ansys (ANSS), October 6, 2008 at

 

http://arminfields.wordpress.com/2008/10/06/assessing-ansys-anss

 

[B] The Online Study participants chose 8.20% as GWW’s estimated Sales growth for the next 5 years which reflected the company’s historic sales growth for the past 5 years.  They were given three other choices: 3.7%, 10 year historic growth; 9.6%, last 4 quarters; and 11.7%, the consensus estimate from YahooFinance.

 

When I checked YahooFinance, I found that the 11.7% was for estimated EPS growth (not Sales growth) and that Yahoo makes no estimate for 5 year Sales growth.  However, Zacks.com is currently estimating 8.29% Sales growth for the next 5 years.

 

[C] The Consensus used the NAIC-BI Preferred Procedure (PP) to estimate 8.2% as GWW’s future EPS growth.  The PP involves making four estimates for the next 5 years: Sales growth (previously decided at 8.2%), Pre-Tax Profit Margin, Tax Rate, and Shares Outstanding.

 

Participants chose 9.9% as the PTPM, a weighted average offered by Brian and up from the simple 5 year average of 9.5%.  Granger’s PTPM has been increasing and I get 10.1% as the last three year and 10.4% as the last two year average, neither of which were proposed to the group.

 

The two remaining PP factors were decided by Brian: 38.4% Tax Rate (Toolkit’s default and essentially the same as VL’s estimate) and 70.0 M Shares Outstanding (from VL’s estimate on 10-10 overriding the TK default of 76.1M shares).

 

If 10.4% had been used for the PTPM (instead of 9.9%), the Preferred Procedure would have resulted in 9.3% EPS (instead of 8.2%).  That is one reason I don’t use the PP: too many estimates and too much guesswork for me.  Should SSGers use 5.5% estimated EPS for Grainger (the TK default PP), 8.2% (the Consensus decision), or 10.1% (my optimistic result)?

 

[D] When I did my SSG, the six analysts I always check were closely estimating long-term EPS at an average of 11.55% with S&P and FactSet CallStreet via CNN Money high at 12.00% and Zacks.com low at 10.85%.  Value Line was 11.00% on 1-9 (down from 12.5% on 10-10); Reuters via Morningstar was 11.70%; and First Call via YahooFinance was 11.73%.

 

FactSet’s estimate was from 6 analysts who ranged from a low of 7.00% to a high of 15.00%. 

 

I used 7.00% which was from FactSet and the very lowest estimate from all the analysts.

 

[E] Take Stock’s 3.30% initial and 1.00% final EPS estimate are way, way low and I consider them unreasonably low and untrustworthy by comparison to the other SSGs and to the six analysts.  Take Stock’s low-ball estimate is why it got such a low Forecast High Price and Total Return.

 

[F] To decide the Forecast High PE, Brian proposed 5 choices: 20% expansion of the current High PE (24.0); 10% expansion (22.0); High PE from most recent year (20.0); average of High and Low PEs for last 5 years (17.5); and a 20% decline of current High PE (16.0).  The Consensus chose 20.0, the High PE from the most recent year.

 

I thought these were innovative choices although I wish we had some factual basis to support the choice of a percentage increase or decrease.  Still, the idea can be useful if SSGers want to be optimistic or pessimistic, but (at least  for me) always in combination with VL’s High Price estimate as a target that I never want to substantially exceed or fall under.

 

[G] To decide the Forecast Low PE, Brian offered 4 choices: the 5 year average Low PE (14.7); the lowest Low PE in the last 5 years (13.7); the current PE (12.5 or maybe 13.2); and a 20% decline of the current Low PE (10.0).  The Consensus chose 13.7, the lowest Low PE in the last 5 years.

 

[H] S&P places Grainger in the Wholesale Trade industry and GWW is better than its industry averages in terms of Pre-Tax Profit Margin (9.50% vs 8.40%) as well as Return on Equity (15.00% vs 12.75%).  Direct competitors according to YahooFinance and Hoovers.com are Applied Industrial Technologies (AIT), Wesco International (WCC), and Graybar Electric (private).  AIT and WCC are also in this S&P Wholesale Trade industry.

 

[I] Hemscott places Grainger in a different industry, Electronics Wholesale, and GWW is also better than its industry average in terms of PTPM (9.50% vs 7.00%) but worse in terms of ROE (15.10% vs 16.40%).  Competitor WCC is also in this Hemscott Electronics Wholesale industry, but AIT is not.

 

- Armin