Will Soft Monthly Sales Drag Grainger's (GWW) Q2 Earnings?

W.W. Grainger, Inc. (NYSE:GWW) is set to report second-quarter 2016 results before the opening bell on Jul 19. Grainger posted a year-over-year increase in both earnings and sales in first-quarter 2016. Let’s see how things are shaping up for this announcement.

Earnings Whispers

Our proven model does not conclusively show that Grainger is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for greater chances of an earnings surprise. Unfortunately, this is not the case here, as elaborated below.

Zacks ESP: The Earnings ESP for Grainger is +0.63%. This is because the Most Accurate Estimate of $3.22 stands above the Zacks Consensus Estimate of $3.20.

Zacks Rank: However, Grainger’s Zacks Rank #4 (Sell) lowers the predictive power of ESP. We caution investors against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement.

Surprise History

Last quarter, Grainger posted a positive earnings surprise of 11.19%. Notably, the company has outpaced the Zacks consensus estimate in three of the trailing four quarters, with an average earnings beat of 7.24%.

Factors to Consider

Given the deflationary environment, Grainger remains cautious on gross margins. Thus, the company anticipates gross profit margins to be down 130–150 basis points in second-quarter 2016 from second-quarter 2015.

Notably, Grainger reported a meager 1% increase in monthly sales in May following a 4% rise in April. According to Grainger, daily sales gain in June will be about the same as the sales results reported for May. This does not bode well for second-quarter revenues.

Further, lower oil and gas prices, strength in the U.S. dollar and the economy in Canada remain headwinds for the company.

Moreover, the activities of Grainger during the quarter have not been able to win analysts’ confidence as reflected by the 5 downward revisions in earnings estimates (versus no upward revision) over the last 30 days. The Zacks Consensus Estimate has been revised 1% downward over the last two months.

Stocks That Warrant a Look

Here are some stocks worth considering, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Ball Corp. (NYSE:BLL) has an Earnings ESP of +1.01% and a Zacks Rank #3.

Bemis Company, Inc. (NYSE:BMS) has an Earnings ESP of +1.18% and a Zacks Rank #3.

Colfax Corp. (NYSE:CFX) has an Earnings ESP of +15.39% and a Zacks Rank #3.