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Morgan Stanley raised their stock price forecast on W.W. Grainger to $401 from $366, assigning an “Equal-weight” rating after the Fortune 500 industrial supply company reported a 2.4% increase in sales to $3.0 billion in the third quarter driven by significant share gains in the U.S. segment and strong growth in the endless assortment businesses.

W.W. Grainger reported that its U.S. segment sales were up 3.1%, outgrowing the U.S. MRO market which declined an estimated 5% to 6%. This increase was driven largely by higher volume of pandemic-related products, partially offset by year-over-year decreases in non-pandemic product sales.

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The industrial products company reported earnings per share of $4.41 in the third quarter of 2020, up 4% versus $4.25 in the 2019 third quarter. Adjusted earnings per share in this quarter of $4.52 increased 6% versus $4.26 in the 2019 third quarter.

“We raise our estimates and increase our price target to $401 from $366 prior as we roll EPS one quarter forward, and we remain Equal-weight. Our 4Q20 EPS now sits at $3.93 vs. $3.92 prior, and our full-year 2020/2021 estimates are now $16.45/$18.70 vs. $16.16/$17.55 prior. Our $401 price target is based on 20x NTM EPS of $20.05. Our 20x multiple assumes that W.W. Grainger (GWW) trades at a -6% discount to peers, below its long-term average,” said Joshua Pokrzywinski, equity analyst at Morgan Stanley.

“A near-term deceleration in growth and gross margins set up a weaker 4Q than expected. 2021 should be better with mix and fewer cost headwinds. Portfolio optionality continues to look interesting on MonotaRO, Cromwell, and Canada. Tax risk and PPE comps act as a governor to rerating near-term.”

Grainger’s shares closed 0.27% lower at $361.03 on Friday; however, the stock is up about 7% so far this year.

Morgan Stanley gave a target price of $449 under a bull scenario and $312 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. W.W. Grainger had its target price lowered by equities analysts at Deutsche Bank to $399 from $429.00. The brokerage currently has a “hold” rating on the industrial products company’s stock.

Jefferies boosted their price objective on W.W. Grainger to $450 from $410 and gave the stock a “buy” rating. UBS Group started coverage with a “buy” rating and gave a target price of $416.00 on the stock. At last, Stephens also started coverage and they set an “equal weight” rating on the stock.

Eight analysts forecast the average price in 12 months at $392.63 with a high forecast of $450.00 and a low forecast of $290.00. The average price target represents an 8.75% increase from the last price of $361.03. From those eight, four analysts rated “Buy”, three rated “Hold” and one rated “Sell”, according to Tipranks.

“We view Grainger’s (GWW) COVID-19 disruption as in-line with our group. We expect growth to normalize in 2021, but with significant disruptions to revenue in the short-term. GWW is less able to execute on price in weaker markets in the short term. As markets pick back up in 2021, we see a more bullish case on price forming, but for the near term we see margins pressured,” Morgan Stanley’s Pokrzywinski added.

“For Amazon, we believe there is a large enough technical moat to commercial & industrial markets to avoid a pure low touch model. Office environments seem more at risk for now, although technology could evolve to help cross the technical rubicon to sell to GWW’s customers. This does not appear priced in, even as a long-term risk.”

Upside Risks: Continued progress on productivity savings or surgical pricing activity to spur growth could sustain margin performance without jeopardizing growth. Grainger is a short-cycle bellwether, which could drive outsized share outperformance if macro momentum improves.

Downside Risks: Amazon (AMZN) presents a threat to GWW’s online business and stands to lose market share as Amazon moves into more sophisticated applications.

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