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Zacks Investment Research downgraded Graham Corp. (GHM - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on February 6, 2013.

Why the Downgrade?

After the release of its financial results for the third quarter of fiscal 2013 (ended Dec 31, 2012) on Feb 1, 2013, earnings estimates for this metal fabrication company witnessed downward revisions. The Zacks Consensus Estimate for fiscal 2013 went down by 5.1% to 94 cents while that for 2014 decreased by 5.4% to $1.23 per share in the last 7 days.

Earnings per share, adjusted for one-time items, in the quarter came in at 21 cents, roughly 22.2% below the Zacks Consensus Estimate of 27 cents. On a year-over-year basis, earnings were an improvement over 16 cents earned in the year-ago quarter.

Revenue increased 5% on the back of healthy growth of 37% in international sales recorded in the quarter. Sales in the U.S. market were weak and down 18.0% year over year, due primarily to project delays associated with the naval nuclear propulsion program. Orders in the quarter were down 4% sequentially while gross margin was pulled down by 270 basis points.

For fiscal 2013, management revised down its revenue expectation from the $105-$115 million range to the range of $102.5-$107.5 million. SG&A is now expected to be 16.5%-17% of revenue as against 16%-17% expected earlier.

Negative earnings surprise in three out of four trailing quarters with the average being -0.7%, raises skepticism over the financial health of the company. For fiscal 2013 and 2014, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of -2.1% and -0.8%, respectively.

Other Stocks to Consider

Other stocks to watch out for in the industry are Altra Holdings, Inc. (AIMC - Snapshot Report), Metso Corp. (MXCYY) and Atlas Copco AB (ATLKY), each holding a Zacks Rank #1 (Strong Buy).

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