The Bright Side of Oil and Gas Pains
GWW's pullback more than discounts the temporary bad news
Petroleum-related businesses are down across the board due to weakness in crude oil. High quality, but little-followed industrial supplier W.W. Grainger (GWW, Financial) has certainly not been immune.
Wednesday’s announcement that Q3 earnings dropped 11.5% from $3.30 to $2.92 year over year, sent the stock to under $200 from a 52-week high of $261.57. Estimates for 2015 and 2016 have been reduced to $11.75 and $12.12.
The pullback might provide a good entry point for value investors. Over the last decade, which included the effects of the Great Recession, GWW’s numbers were quite impressive.
The firm’s balance sheet is solid. Dividends are growing and well-covered. The stock’s beta is below average and its safety rating is top notch. Grainger cranks out predictable profits. Its shares have outperformed 80% of Value Line's 1,700-company main research universe over the long haul.
In September 2013 before oil swooned, GWW hit an all-time peak of $276.38. EPS that year finished lower than this year's at $11.52. Optimistic traders paid 24x earnings to own the shares, while accepting just a 1.30% yield.
At the Oct. 21 quote of $199.93, investors can own the same share for 17x times what may be trough earnings accompanied with a 2.34% dividend. Both those figures represent better than average valuations for this fine company.
Value Line sees GWW’s EPS growing to north of $18 over the three to five-year time frame as oil demand more than catches up with supply. Applying a more typical multiple to that projection would support a long-term target in the mid-$300s.
Research firm Morningstar likes the stock. They assign it a 4-star (out of 5) BUY rating, while calling present day fair value as $239, about 20% above today’s low. Grainger's actual highs in 2013, 2014 and 2015 YTD each far exceeded Morningstar's very conservative expectations at $276.38, $269.38 and $257.00.
Option savvy traders who’d like to make some money, and would be willing to own GWW even cheaper, should consider selling some GWW April 15, 2016 expiration date puts at either $190 or $200 strike prices.
Taking the bid price of $8.50 on the lower-priced option would drop the ‘if exercised’ price down to $181.50 ($190 strike price less the $8.50 put premium per share). That is lower than the lows on GWW dating all the way back to the first half of 2012.
The best case scenario with any put sale is keeping 100% of any premium received up front wihtout ever needing to buy the shares. The worst case result on this specific trade would be forced purchase of 100 Grainger shares per contract sold at a net cost basis that has not been available in more than three years.
Take advantage of what is likely to turn out to be a substantial, but temporary, dip in the company’s stock price. Own some shares, sell some puts or do both.
Disclosure: Long GWW shares.
