Unlock: Grainger (GWW) Trade Idea
(This GWW Trade Idea was issued on December 7 for $1.60. Trade was closed today for $5.00 or +212% gain.)
Sector: Industrial Machinery & Equipment
Current Price: $197.86
Stop Loss: $207.00
Time Duration: 39 Days
Trade Idea – Buy GWW Jan’16 195-185-175 Put Butterfly Spread for $1.60 or less.
Using the same exact logic as our bearish trade on Fastenal (FAST), previously, we like buying puts in GWW in anticipation of continued weakness in coming months. Last quarter the company posted following results:
– Q3 EPS $3.03 vs. $3.06 estimate
– Q3 Revenues $2.53B vs. $2.56B estimate
– FY2015 EPS Guidance $11.70 vs. $12.25 estimate
Following that earnings report, GWW hosted Analyst day on November 12. It issued 2016 EPS guidance of $10.80-$13.00 based on -1% to +7% sales growth. GWW’s wide 2016 guidance range underscores the difficult environment in which it is operating. In assessing the components of the 2016 EPS bridge, we believe the midpoint of the guide is at risk given (taking different talking points from Goldman Sachs and Wells Fargo research):
(1) Decelerating sales. We expect organic daily sales to decelerate in both the US (-2.2% vs. +0.3% in 2015) and Canada (- 10.2% vs. -8.9% in 2015). Heavy manufacturing/O&G headwinds, coupled with recent commentary from OEMs (PH, ROK) that 2016 is unlikely to see a meaningful recovery;
(2) Pricing declines intensify. We expect 1.5pt of price declines in the US, which equates to over $1 in EPS. Of note, US pricing deteriorated to -2pt in Oct, marking 9 months of declines;
(3) Cost-outs not enough to offset. We expect ~$60mn in cost-outs (almost $0.60) from GWW’s actions on procurement, branches, and US restructuring;
(4) B/S and cash flows provide limited backstop. In the event of a shortfall in growth, we do not see much room to lever up beyond what is required for the $800mn buyback given GWW’s target gross debt/EBITDA of 1.0-1.5x.