Gorman-Rupp Lowered to Strong Sell

Zacks Investment Research downgraded Gorman-Rupp Co. ( GRC - Snapshot Report ) to a Zacks Rank #5 (Strong Sell) on February 13, 2013.

Why the Downgrade?

On February 8, 2013, this diversified machinery company reported its fourth quarter and year 2012 financial results. The company’s earnings per share came in at 26 cents, below 34 cents reported for the year-ago quarter. The results also missed the Zacks Consensus Estimate of 34 cents by 23.5%.

Sales declined 4.7% due to weakness experienced in the demand from the water and non-water end markets. Gross margin increased a mere 10 basis point while operating margin registered a 190 basis point decline due primarily to lower volumes in the quarter.

Exiting the year, the company’s backlog of orders was down 7.8% year over year at $143.4 million due to shipments as well as lower orders from the construction, municipal, industrial and OEM end markets.

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.

The Zacks Consensus Estimate for fiscal 2013 went down by 5.1% to $1.50 while that for 2014 decreased by 1.1% to $1.87 per share in the last 30 days.

Downward revision in earnings estimate and negative earnings surprise in three out of four trailing quarters with the average being -6.3%, raise our skepticism about the financial health of the company. For fiscal 2013 and 2014, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of -6.7% and -14.4%, respectively.

Other Stocks to Consider

Other stocks to watch out for in the industry are Altra Holdings, Inc. ( AIMC - Snapshot Report ) with a Zacks Rank # 1 (Strong Buy) while Metso Corp. ( MXCYY ) and Atlas Copco AB ( ATLKY ) , each holds a Zacks Rank #2 (Buy).