W.W. Grainger Stock Is Estimated To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of W.W. Grainger (NYSE:GWW, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $424.04 per share and the market cap of $22.2 billion, W.W. Grainger stock is estimated to be modestly overvalued. GF Value for W.W. Grainger is shown in the chart below.


W.W. Grainger Stock Is Estimated To Be Modestly Overvalued
W.W. Grainger Stock Is Estimated To Be Modestly Overvalued

Because W.W. Grainger is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 6.9% over the past three years and is estimated to grow 5.32% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. W.W. Grainger has a cash-to-debt ratio of 0.24, which is worse than 75% of the companies in Industrial Distribution industry. The overall financial strength of W.W. Grainger is 6 out of 10, which indicates that the financial strength of W.W. Grainger is fair. This is the debt and cash of W.W. Grainger over the past years:

W.W. Grainger Stock Is Estimated To Be Modestly Overvalued
W.W. Grainger Stock Is Estimated To Be Modestly Overvalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. W.W. Grainger has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $11.8 billion and earnings of $12.82 a share. Its operating margin is 8.64%, which ranks better than 80% of the companies in Industrial Distribution industry. Overall, the profitability of W.W. Grainger is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of W.W. Grainger over the past years:

W.W. Grainger Stock Is Estimated To Be Modestly Overvalued
W.W. Grainger Stock Is Estimated To Be Modestly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of W.W. Grainger is 6.9%, which ranks better than 68% of the companies in Industrial Distribution industry. The 3-year average EBITDA growth rate is 0.9%, which ranks worse than 68% of the companies in Industrial Distribution industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, W.W. Grainger's ROIC is 17.96 while its WACC came in at 8.23. The historical ROIC vs WACC comparison of W.W. Grainger is shown below:

W.W. Grainger Stock Is Estimated To Be Modestly Overvalued
W.W. Grainger Stock Is Estimated To Be Modestly Overvalued

In summary, the stock of W.W. Grainger (NYSE:GWW, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 68% of the companies in Industrial Distribution industry. To learn more about W.W. Grainger stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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