3 Reasons GWW is Risky and 1 Stock to Buy Instead

Over the past six months, W.W. Grainger’s shares (currently trading at $952.66) have posted a disappointing 8.7% loss, well below the S&P 500’s 19.5% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in W.W. Grainger, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Even with the cheaper entry price, we’re swiping left on W.W. Grainger for now. Here are three reasons you should be careful with GWW and a stock we’d rather own.

We can better understand Maintenance and Repair Distributors companies by analyzing their organic revenue. This metric gives visibility into W.W. Grainger’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations – non-fundamental factors that can manipulate the income statement.

Over the last two years, W.W. Grainger’s organic revenue averaged 4.9% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect W.W. Grainger’s revenue to rise by 4.4%, close to its 8.7% annualized growth for the past five years. This projection doesn’t excite us and suggests its newer products and services will not lead to better top-line performance yet.

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

W.W. Grainger’s unimpressive 5.9% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.

W.W. Grainger’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 22.5× forward P/E (or $952.66 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.

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