Monday, Credit Suisse upgraded W.W. Grainger, Inc. (GWW) shares to Outperform from Neutral and increased its price target to $112 from $85. The brokerage raised its 2010 EPS estimate to $5.90 from $5.68.
Analyst Mazari said that his upgrade reflects a more attractive risk/reward versus peers, combined with what he believes to be faster top-line growth than the market expects based on his proprietary distribution sales index model. Certain supply chain initiatives, product sku, and market expansion should also drive higher margins over the next couple of years.
The analyst raised estimate to account for his revised estimate of top-line growth combined with structural cost savings driven by better procurement and supply chain. The analyst's 2010 estimate is well above the $5.58 consensus forecast.
The brokerage believes third quarter earnings on October 14 would likely surprise to the upside combined with the annual analyst day on November 18, when Grainger would likely lay out its strategic plan. The analyst day will include 2010 guidance and long term margin targets, which the brokerage believes will come in higher than expectations. The brokerage thinks both the above events should lead to upward earnings revisions.
The analyst raised estimate based on his estimate of normalized EPS of $6.51 at an 18x P/E multiple. GWW is trading at over a 30% discount to its more cyclical industrial distribution peers, and a lot of that is an expectation that Grainger's sales growth will be much more muted than peers in an economic recovery. The analyst thinks it would not be as muted as many may think.
Currently, GWW is up $2.90 or 3.20% and trading at $93.64.
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