WW Grainger: Industrial with Relative Strength

Jan.17.09 | About: W.W. Grainger, (GWW)

I continue to believe that the bears on the Industrial sector are wrong. The reason is partly based on my belief that the worldwide infrastructure build out, while slowed, is still alive. A couple of weeks ago I showed that Emerson Electric (NYSE:EMR) was trying to put in a bottom. I also indicated that our models suggested that EMR was undervalued.

Another stock that is showing remarkable relative strength vs. the S&P 500 is WW Grainger (NYSE:GWW). GWW, one of the world leading providers of maintenance, repair, and operating supplies has had an impressive string of earnings and dividend hikes over the last few years and has continued to do well in recent quarters.
GWW's Dividend Valuation Chart above (click to enlarge) currently shows the price line (red line) buried deep into the value bar (blue bar). To us this means the stock is currently significantly undervalued. Projecting in next year's dividend growth and change in interest rates, we see an even higher value bar as shown by the striped bar to the far right. With the stock trading near $76, our model is making the case that GWW may be as much as 25%-30% undervalued.

The chart shows that this is as deeply undervalued as GWW has been in 20 years. If the world economy is turning to dust, GWW will not be immune. However, if the collective efforts of governments worldwide to stimulate growth through increased emphasis on infrastructure is successful, the company is likely to continue its good trends of earnings and dividends growth.

Disclosure: The authors, DCM staff, and our clients own this stock. Do not make investment decisions based on this blog. It is for information purposes only.