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Boring Is Best: Under the Radar

Stocks in this article: GWW FAST BDK

BOSTON ( TheStreet) -- W.W. Grainger (GWW) is a distributor of facility-maintenance products. Humdrum, yes. featured Grainger in "Under the Radar" on July 7. The flashlight and hand-tool purveyor turned out to be a lucrative investment. Its shares have appreciated 25% since the article, outpacing the Dow Jones Industrial Average and S&P 500 Index. More importantly, Grainger advanced 27% over a two-year horizon when the Russell Midcap Index fell 18%.

The stock price broke through the $100 barrier last week and recorded a 52-week high on Wednesday, following an upward revision of 2010 earnings guidance. Management now expects full-year earnings between $5.40 and $5.90 a share. Assuming the company can achieve the upper end of its target, the stock appears fairly valued at a price-to-earnings ratio of 17. Grainger pays a quarterly dividend, currently at 46 cents, and has been increasing payouts for more than 25 years, making it a Standard & Poor's Dividend Aristocrat.

But with a yield around 1.8%, it's hard to get excited about Grainger. The stock recently popped into our top 50 list, despite posting lackluster quarterly results. Fourth-quarter net income dropped 10% to $97 million, and earnings per share fell a more modest 7.3% to $1.27, cushioned by a lower share count. Revenue ascended 2.6% to $1.6 billion. Grainger's gross margin narrowed from 45% to 42%, and its operating margin tightened from 11% to 10%.

Grainger's stock is cheaper than that of comparably sized wholesaler Fastenal (FAST) and that of tool-maker Black & Decker (BDK) on the basis of trailing and projected earnings. Black & Decker's quarterly operating margin clocked in at 7.5%, whereas Grainger's hit 10%.

Despite Grainger's shrinking profit margin, its stock rose 5.6% over the past month as the S&P 500 corrected 1.2%. What's the angle?

Grainger recently went on an acquisitions binge. Notably, it purchased Alliance Energy Solutions, which is expected to be accretive to 2010 earnings by 1 or 2 cents. Alliance performs energy audits and retro-fitting. The Energy Policy Act of 2005, recently extended until 2013, allows companies that retrofit buildings to realize a one-time tax deduction in the year the project is completed. This jibes with Grainger's existing facility-maintenance offerings and will likely offer cross-selling opportunities.

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