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Graco (GGG) Lags Q1 Earnings Estimates, Withdraws Sales View

Graco Inc. GGG delivered weaker-than-expected results for the first quarter of 2020. Its earnings and sales missed estimates by 13.6% and 5.6%, respectively.

Adjusted earnings in the quarter under review were 38 cents per share, lagging the Zacks Consensus Estimate of 44 cents. On a year-over-year basis, earnings decreased 19.1% due to weak revenue generation and a fall in margins.

Top-Line Details

In the reported quarter, Graco’s net sales were $373.6 million, suggesting a 7.7% decline from the year-ago quarter. Volume and price adversely impacted sales by 8%, while forex woes had an adverse impact of 1%. However, acquisitions contributed 1%.

Also, the company’s net sales lagged the Zacks Consensus Estimate of $395.6 million.

On a geographical basis, quarterly sales generated from the Americas fell 3% to $224.8 million. In EMEA, sales were $87.8 million, decreasing 12% year over year (or slipped 10% at a constant-currency rate), while sales from the Asia Pacific were $61 million, declining 17% year over year (or were down 15% at a constant-currency rate).

The company reports revenues under three segments. A brief discussion of the quarterly results is provided below:

The Industrial segment’s revenues totaled $158.7 million, suggesting a 16.1% decline from the year-ago quarter. Volume and price had an adverse impact of 15% on sales, and forex woes too lowered sales by 1%. The segment’s sales accounted for 42.5% of the company’s net revenues in the quarter.

The Process segment’s sales of $86.1 million were down 0.9% from the year-ago quarter. Acquisitions contributed 5% to sales growth, while volume and price had an adverse impact of 6% in the quarter. The segment’s sales accounted for 23.1% of net revenues in the reported quarter.

The Contractor segment’s revenues were flat year over year at $128.8 million. Volume and price had a positive impact of 1% on sales, while forex woes adversely influenced sales by 1%. The segment’s sales accounted for 34.4% of net revenues in the reported quarter.

Margin Profile

In the reported quarter, Graco’s cost of sales decreased 7.4% year over year to $174.9 million. It represented 46.8% of the quarter’s net sales versus 46.6% in the year-ago quarter. Gross profit decreased 8.1% year over year to $198.6 million, while margin was down 20 basis points (bps) to 53.2%. The fall in margin was triggered by unfavorable product and channel mix, forex woes, and weak factory volume, partially offset by favorable pricing.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) declined 2.4% year over year to $108.8 million. It represented 29.1% of net sales in the reported quarter versus 27.5% in the year-ago quarter.

Operating profit decreased 14.1% year over year to $89.8 million. The results suffered from unfavorable movements in foreign currencies, and weakness in the Industrial and Process segments, partially offset by improvements in the Contractor segment. Operating margin decreased 180 bps year over year to 24%.

Interest expenses in the reported quarter decreased 29.7% year over year to $2.5 million. Effective tax rate in the quarter was 11%, down 3 percentage points from the previous-year quarter.

Balance Sheet & Cash Flow

Exiting the first quarter, Graco had cash and cash equivalents of $456.7 million, suggesting a 106.7% increase from $221 million recorded in the last reported quarter. Long-term debt expanded 143.5% sequentially to $400 million.

In the quarter, the company generated net cash of $54.2 million from operating activities, rising 7.3% from the year-ago quarter. Capital spent on the addition of property, plant and equipment totaled $18.9 million versus $30.4 million in the first quarter of 2019.

The company distributed dividends worth $29.3 million and repurchased 2.1 million shares for $82.2 million during the quarter.

In the near term, Graco seems well-equipped — with operations running globally, healthy liquidity position and efficient management team — to handle the challenges related to the coronavirus outbreak.

However, the company did mention that there has been a 30% fall in incoming order rates since mid-March. Given the prevailing economic uncertainties, it suspended revenue projections for 2020. Notably, the company had earlier predicted organic sales (at a constant-currency rate) to grow in low-single digits in the year.

On the contrary, it still predicts capital expenditure of $70 million for the year. This includes $50 million for the expansion of facilities. Corporate expenses (unallocated) are estimated to be $30 million (maintained). Unfavorable movements in foreign currencies are estimated to adversely impact sales by 1% and earnings by 3% in the year.

Effective tax rate for the second quarter and 2020 is predicted to be 20-21%.

Graco Inc. Price, Consensus and EPS Surprise


Graco Inc. price-consensus-eps-surprise-chart | Graco Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of $7.5 billion, Graco currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Broadwind Energy, Inc. BWEN and CECO Environmental Corp. CECE. While Tennant sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and CECO Environmental carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for the companies have been unchanged for the current year. Further, positive earnings surprise for the last four quarters was 26.6% for Tennant, 10.42% for Broadwind Energy and 26.98% for CECO Environmental.

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