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Why W.W. Grainger Stock Rose 12% in May

By Reuben Gregg Brewer – Jun 5, 2020 at 11:19AM

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Granger saw a solid gain last month after it appeared to take the COVID-19 crisis in stride. However, it's hard to suggest it's doing well here.

What happened

Shares of industrial products supplier W.W. Grainger (GWW 3.60%) rose a respectable 12% in May, according to data from S&P Global Market Intelligence. That easily beat the S&P 500's gain of around 5%. There wasn't any material news out of the company during the month, but its late April earnings release set the stage -- sort of.

So what

Grainger's Q1 sales were fairly strong, up 7% year over year. It was a complicated quarter on the bottom line, though, as the company took one-time charges on a business that it eventually agreed to divest in early June. Those costs led to a 29% decline in earnings in Q1. However, if you pull those costs out, the drop was a more modest 6%. That's not great, but in the face of COVID-19, earnings weren't exactly bad.   

Two people looking at a computer with a stock graph on the screen

Image source: Getty Images.

However, when Grainger held its first-quarter 2020 earnings conference call, management stated that the actual impact of COVID-19 wasn't entirely clear. The company sells such a vast array of products to so many different businesses that there were a lot of puts and takes that offset each other. That said, gross profit margin fell 180 basis points because of product mix, driven by increased demand for safety equipment and supplies. In other words, it looks like sales related to COVID-19 haven't been a huge benefit to the bottom line even if they have helped support the top line. 

Now what

Grainger is one of the largest players in its industry and is highly likely to manage the current headwinds in relative stride. All in, when you look at sales and earnings, the outsize gain in the stock in May is likely more to do with a general improvement in investor expectations for the future than anything company-specific at this point. And there is good news out there, including the reopening of the U.S. economy and positive developments around a potential COVID-19 vaccine. However, long-term investors should tread cautiously at this point. Grainger operates in a cyclical industry and the worldwide effort to contain the coronavirus is likely to lead to a global recession. That wouldn't be a good outcome for this industrial concern.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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