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Will Q3 Earnings Hold a Surprise for Grainger (GWW) Stock?


The leading broad line supplier of maintenance, repair and operating (MRO) products, W.W. Grainger, Inc. GWW, is scheduled to report third-quarter 2016 results on Oct 18, before the opening bell.

Last quarter, the company posted a year-over-year decline in earnings. Let’s see how things are shaping up for this announcement.

Earnings Whispers

Our proven model does not conclusively show that the company is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Grainger is 0.00%. This is because the Most Accurate estimate of $3.02 is in line with the Zacks Consensus Estimate.

Zacks Rank: Grainger carries a Zacks Rank #3, which increases the predictive power of ESP However, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Surprise History

In the second quarter of 2016, Grainger posted a negative earnings surprise of 8.83%. However, it surpassed the Zacks Consensus Estimate in two of the last four quarters with an average positive earnings surprise of 3.14%.

GRAINGER W W Price and EPS Surprise

GRAINGER W W Price and EPS Surprise | GRAINGER W W Quote

Factors to Consider

Given the deflationary environment, Grainger remains cautious on gross margins. Thus, gross profit margins for the third quarter of 2016 are projected to be down 100−140 basis points from the prior-year period.

Notably, Grainger issued $400 million of new debt in mid-May, which led to an increase in interest expense in the second quarter. The third and fourth quarters too will contain the higher interest expense, which will hurt earnings.

Though Grainger has made many investments and taken several actions to restructure its business, it continues to be affected by lower oil and gas prices, currency headwinds and weak macroeconomic conditions in Canada.

Stocks that Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Casella Waste Systems Inc. CWST, which has seen upward estimate revisions of 25% over the past 7 days for the quarter, has an Earnings ESP of 90.00% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ball Corporation BLL has an Earnings ESP of +5.44% and a Zacks Rank #2. The company delivered an average positive earnings surprise of 3.51% over the trailing four quarters.

HD Supply Holdings, Inc. HDS has an Earnings ESP of +1.25% and a Zacks Rank #3. The company beat the Zacks Consensus Estimate in three of the last four quarters by an average of 4.79%.

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