W.W. Grainger Inc. (GWW), at its annual analyst meeting, provided an update on its fourth quarter, fiscal 2010 and fiscal 2011 EPS, sales, margins and cash flow.

Fiscal 2010 Fourth Quarter Outlook

For the fiscal fourth quarter, the company expects EPS in a band $1.49 to $1.69. The mid point of the range suggests a 14% growth over the EPS of $1.39 recorded in the fourth quarter of fiscal 2009.

Sales growth is projected in the range of 8% to 10% driven by market share gains of 5% to 7%, oil spill sales contributing 2%, and foreign exchange and acquisitions with a contribution of 1% each. In dollar terms, sales are expected to be around $1.8 billion. Operating margin will lie within 10.5% to 10.7%.

Fiscal 2010 Outlook

Grainger upped its low end of its fiscal 2010 EPS guidance to a narrower range of $6.50 and $6.70 from the previous $6.40 to $6.70. The midpoint of the range suggests a 23% growth over 2009 EPS of $5.38.

The sales growth guidance, however, remains unchanged, in the band of 14% to 15%, constituting market share gains in the range of 7% to 8%, while oil spill sales, foreign exchange and acquisitions contributing 1%, 2% and 4%, respectively.

In dollar terms, sales are expected to range within $7.1 billion and $7.2 billion. Operating margin is expected to be between 11.3% and 11.4%.

Fiscal 2011 Outlook

For fiscal 2011, the company forecasts EPS to range between $7.15 and $7.90. Considering the mid point of the prior-year guidance as the base point, the year-over-year growth stands at 14%. The 5% to 9% growth in sales is expected to be driven by market share gains in the range of 5% to 8%, and price effect of 1% to 2%. Operating margin will be within 11.6% and 12.2%.

Margins – A Long-Term Outlook

As regards margins, Grainger expects to expand its operating margin by approximately 50 basis points per year. The company now has a new long-term objective in place to increase its operating margin to a range of 14% to 16%, up from the previous 11% to 13%.

Cash Flow Outlook

For 2010, Grainger projects cash flow from operations of $675 million to $725 million. For 2011, cash flow from operations is pegged at $550 million to $650 million. Grainger intends to reinvest one third of its cash flow in its business.

Capital expenditure is slated to be within $125 million to 150 million for 2010 and $175 million to $200 million for 2011. Grainger has earmarked $500 million for share repurchase or acquisition in 2010 and in the range of $210 to $265 million for 2011.

Recent Results

Grainger recently reported October sales growth of 11% year over year. Growth in October, however, moderated from the preceding months plunging to the lowest point thus far in this fiscal year. Monthly sales have gradually dropped from the high figures of July, August and September that saw sales shoot up 21%, 20% and 18%, respectively.

October results were affected by one less selling day than the prior-year comparable period. The fourth quarter of 2010 will have 63 selling days versus 64 selling days in 2009.

The third quarter 2010 operating earnings of Grainger were $1.99 per share versus $1.51 per share recorded in the year-ago quarter, outperforming the Zacks Consensus Estimate of $1.82. Revenues in the quarter were $1,899.4 million, a 19.5% jump from $1,589.7 million in the year-ago period and also above the Zacks Consensus Estimate of $1,848 million.

Our Take

Grainger remains focused on expanding its product offering and has the financial wherewithal to further invest in growth opportunities, increase dividends and reinvest capital through share repurchases.

Gradually improving economic activity, market share gains, benefits from growth investments, share repurchases and acquisition accretion should lead to strong earnings growth in 2010 and 2011. The company retains a Zacks #2 Rank (short-term Buy recommendation). We also maintain an Outperform rating on the stock.

Lake Forest, Illinois-based Grainger is a distributor of facilities maintenance and other related products and services. The company distributes material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components.