On Tuesday, Morgan Stanley (NYSE:MS) updated its outlook on WW Grainger (NYSE: NYSE:GWW), raising the price target to $1,215 from the previous $990, while keeping an Equalweight rating on the stock. The revision reflects an anticipation of organic growth and gross margin improvements leading into fiscal year 2025.
The analyst from Morgan Stanley noted that the increase in the price target is based on raised earnings per share (EPS) forecasts, driven by expected gross margin (GM) upside in the fourth quarter of this year and the first quarter of the next. Despite the guidance for the fourth quarter being revised upwards post Q3, there is still perceived room for GM to outperform the conservative estimates currently modeled.
The analyst also pointed out that the first quarter of the next year presents a very low comparative bar, with expectations set 10 basis points (bps) lower year over year, against typical seasonality which would suggest a 60 bps increase. Given WW Grainger's plans to adjust prices in line with inflation, a typical GM step up into the first quarter is expected.
Furthermore, the analyst highlighted that WW Grainger's organic growth targets for its High Touch Solutions North America (HTNA) business are relatively modest compared to other short-cycle industrial companies, which have set higher organic growth expectations for the next year.
WW Grainger's addition of 100 bps of price in the second half of the year is seen to contribute 50 bps into fiscal year 2025, with an assumed incremental 150 bps of new price at the start of fiscal year 2025.
In conclusion, with 2 percentage points of price contribution, the consensus for HTNA's organic growth at +5% can be met with flat near-term Industrial Production, which is a conservative estimate, and just low single-digit outgrowth. This is in contrast to the mid-single-digit run-rate and target level that has been set.
In other recent news, W.W. Grainger reported a 4.3% increase in total sales and a 4.7% rise in diluted EPS to $9.87 in its Q3 2024 earnings call. The company's operating margin stood at a strong 15.6%, and it generated an operating cash flow of $611 million. Grainger returned $328 million to shareholders through dividends and share repurchases.
The High-Touch Solutions segment saw a 3.3% sales increase, while the Endless Assortment segment, which includes Zoro and MonotaRO, reported an 8.1% sales increase. The company narrowed its full-year 2024 earnings guidance, projecting a daily organic constant currency sales growth of 4.5% to 5.25% and a diluted adjusted EPS between $38.65 and $39.35.
These are recent developments for the company, which has demonstrated resilience in a challenging demand environment. Grainger's strategic initiatives and commitment to shareholder returns have been noted, and the company's balance sheet remains strong. However, the company is cautious about the outlook for 2025, citing concerns about strong price increases.
InvestingPro Insights
W.W. Grainger's strong financial performance and market position are reflected in recent InvestingPro data and tips. The company's revenue for the last twelve months as of Q3 2024 stood at $16.93 billion, with a 3.99% growth rate. This aligns with Morgan Stanley's positive outlook on the company's organic growth potential.
InvestingPro Tips highlight Grainger's impressive dividend history, having raised its dividend for 32 consecutive years and maintained payments for 54 years. This demonstrates the company's financial stability and commitment to shareholder returns, which could be attractive to investors looking for reliable income streams.
The company's profitability is also noteworthy, with an operating income margin of 15.39% for the last twelve months as of Q3 2024. This robust profitability supports Morgan Stanley's expectations for gross margin improvements.
It's worth noting that Grainger is trading at a high P/E ratio of 31.37, which may reflect investor confidence in the company's future prospects. However, this also suggests that the stock may be priced at a premium compared to its earnings.
For investors seeking more comprehensive analysis, InvestingPro offers 13 additional tips that could provide further insights into Grainger's financial health and market position.
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