Bernstein: Grainger’s third-quarter demand beats expectations; data centers drive growth, but valuation is high

Why did third-quarter results beat expectations?

Grainger reported third-quarter sales of 5.181 billion dollars, above market consensus of 5.086 billion dollars; adjusted earnings per share were 12.54 dollars, above consensus of 11.65 dollars, an increase of 22.8% year over year.
Daily organic sales growth, excluding foreign-exchange and workday effects, was 14.9%, above consensus of 8.9%. North American High-Touch volume grew at a double-digit rate, with pricing continuing to provide support; Endless Assortment comparable sales grew 19.3%.
Adjusted selling, general and administrative expenses increased 7.7%, below the revenue growth rate, lifting adjusted operating margin by 90 basis points year over year. A lower tax rate and fewer shares also helped boost earnings per share.

Bernstein believes the impact of data centers extends beyond direct purchasing: construction and power-supply projects generate contractor, HVAC and repair activity, in turn expanding Grainger customers’ demand for maintenance, repair and operating supplies. The company’s stated direct and indirect exposure to data centers remains above 2%, while Bernstein believes the actual contribution is higher.
Data-center-related projects boosted High-Touch sales in the third quarter, but the contribution was below the second quarter’s by about 90 basis points and reduced the third-quarter margin by about 10 basis points. Sales to contractor customers grew about 25% year over year, while sales to manufacturing customers grew 15%; the latter accelerated from low-double-digit growth in the second quarter.
Broader demand did not eliminate all cost pressures: High-Touch gross margin fell 30 basis points year over year due to freight pressures and unfavorable project mix; Endless Assortment gross margin rose 90 basis points, supported by pricing adjustments and improved product mix.

The company raised the midpoint of its 2026 sales guidance from 19.55 billion dollars to 19.9 billion dollars, and the midpoint of adjusted earnings per share from 46.38 dollars to 47.50 dollars; its daily organic constant-currency sales growth guidance increased from 11.5%–13.0% to 13.0%–14.5%.
Based on the full-year guidance, the fourth-quarter sales midpoint is about 4.96 billion dollars, above market consensus of 4.84 billion dollars; the midpoint for daily organic constant-currency sales growth exceeds 14%, above consensus of 9.3%. In October, that growth rate was about 16% after excluding a benefit of about 2 percentage points from the prior-year government shutdown, but the company expects growth to normalize during the quarter as the comparison base rises and last year’s price increases enter the base.
Fourth-quarter adjusted operating margin is expected to be 15.5%, in line with consensus. Increased supplier rebates and price increases in September should help improve gross margin, but seasonal expense deleverage, higher incentive compensation and technology integration costs will offset some of the gains, while freight pressures will persist.

Bernstein expects demand to remain strong and, based on the improved sales outlook, raised its price target from $ 1250 to $ 1400, while maintaining a Market Perform rating. The closing price on 4 November was $ 1489.39.
The firm noted that the shares have risen about 48% year to date, and the price-to-earnings multiple has increased from 23.1 in January to 29.5; a valuation approaching 30 times leaves limited room for error.