Whether economic recovery is under way or we're still in the trough, things are definitely changing.
Railroad spokespeople, Federal Reserve policymakers, and a huge majority of recently surveyed members of the National Association of Business Economics have all documented their belief that one of the most painful recessions since the 1930s is finally over. We've even seen positive earnings surprises posted this week by such companies as Intel (NYSE: INTC ) and Johnson & Johnson (NYSE: JNJ ) , although the latter missed its revenue targets.
W.W. Grainger (NYSE: GWW ) also beat analyst estimates for its fiscal third quarter. Sales for the maintenance equipment and supply wholesaler fell 13.6%, as a big slide in volume overwhelmed the benefit of increased prices. While pricing helped improve its gross margin, operating profit relative to sales contracted. Earnings per share came in at $1.88 per diluted share, up from a restated $1.77 in last year's quarter. But the rise came only because the company took a one-time investment gain of $0.37 per share.
Winds of change
Grainger's top-line erosion is another sign of how deep this recession has been. As an industrial company, Grainger's customers are primarily businesses and institutions who need its products to keep their facilities up and running. Grainger carries 3M (NYSE: MMM ) adhesives, General Electric (NYSE: GE ) lightbulbs, hand tools -- basically stuff you'd find in janitors' closets, mechanics' garages, and maintenance sheds. So when spending decreases on the kinds of merchandise Grainger sells, you know times are tight for businesses.
But some signs do suggest change afoot. Although consumers, the heart of any economy, are still suffering from job losses and underemployment, don't forget that unemployment is a lagging economic indicator. The Purchasing Managers Index, on the other hand, is sometimes seen as a leading indicator for GDP growth. It recently broke through the 50 threshold, which indicates that business spending in general is expanding once again. If the index continues to show growth, perhaps business spending could help bring our Great Recession to an end.
The great divide
That, in turn, could mean that Grainger's sales have reached or are nearing the bottom. Nevertheless, there still are well-founded reasons for skepticism about the stock market. And it's not clear yet whether Grainger's customers will have enough in their top lines to support increased spending.
With positive free cash flow and a healthy balance sheet with very little debt, Grainger is a solid company worth holding, if you believe that the worst is behind us. Even if you don't, it's a stock you'd be well advised to pick up from the bargain bin if the market turns southward again.
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