It has been about a month since the last earnings report for Graco Inc. (GGG Quick QuoteGGG - Free Report) . Shares have lost about 2.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Graco Inc. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Graco Q1 Earnings Beat Estimates, Revenues Up Y/Y

Graco reported solid results for first-quarter 2021, with earnings and sales surpassing respective estimates by 16% and 5.25%. Notably, this was the fourth earnings beat in a row for the company.

Adjusted earnings in the quarter under review were 58 cents per share, surpassing the Zacks Consensus Estimate of 50 cents. On a year-over-year basis, earnings increased 52.6%, driven by healthy sales generation and improved margins.

Revenue Details

In the reported quarter, the company’s net sales were $454.1 million, reflecting 21.5% growth from the year-ago quarter. Volume and price boosted sales by 19%, acquisition witnessed an adverse impact of 1%, and movements in foreign currencies had a positive impact of 4%.

Also, the company’s net sales surpassed the Zacks Consensus Estimate of $431 million.

Region wise, quarterly sales generated from the Americas grew 18% to $265 million. In the Europe, Middle East and Africa, sales were $110 million, increasing 25% year over year (or up 17% at a constant-currency rate), while sales from the Asia Pacific were $79 million, increasing 30% (or up 22% 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 $184.7 million, reflecting 16.4% increase from the year-ago quarter. Volume and price had a positive impact of 12% on sales, while movements in foreign currencies benefited by 4%. The segment’s sales accounted for 40.7% of the company’s net revenues in the quarter.

The Process segment’s sales of $91.4 million were up 6.2% from the year-ago quarter. Volume and price contributed 7% to sales growth, while acquisitions had an adverse impact of 3% in the quarter. Movements in foreign currencies increased sales by 2%. The segment’s sales accounted for 20.1% of net revenues in the reported quarter.

The Contractor segment’s revenues increased 38.2% year over year to $178 million. The improvement was driven by a 35% contribution from volume and price. Also, movements in foreign currencies boosted it by 3%. The segment’s sales accounted for 39.2% of net revenues in the reported quarter.

Margin Profile

In the reported quarter, Graco’s cost of sales grew 18.2% year over year to $206.8 million. It represented 45.5% of the quarter’s net sales versus 46.8% in the year-ago quarter. Gross profit increased 24.5% to $247.3 million, while margin was up 130 basis points (bps) to 54.5%. The margin improvement was triggered by higher production volume, solid price realization and forex tailwinds. However, channel and product mix along with unfavorable effects of material costs were spoilsports.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 9.4% to $119 million. It represented 26.2% of net sales in the reported quarter versus 29.1% in the year-ago quarter.

Operating profit increased 42.8% year over year to $128.3 million on the back of forex tailwinds and a rise in volumes. Operating margin, adjusted, increased 420 bps to 28.2%.

Interest expenses in the reported quarter decreased 2.3% year over year to $2.4 million. Effective tax rate (adjusted) in the quarter was 19.2%, down 160 bps.

Balance Sheet & Cash Flow

Exiting the first quarter, Graco had cash and cash equivalents of $460.6 million, reflecting a 21.6% increase from $378.9 million recorded in the last reported quarter. Long-term debt remained unchanged at $150 million.

In the first quarter of 2021, the company generated net cash of $101.7 million from operating activities, reflecting a surge of 87.5% from the year-ago comparable period. Capital spent on the addition of property, plant and equipment totaled $21.4 million versus $18.9 million in the first quarter of 2020.

Further, the company distributed dividends worth $31.6 million.

Outlook

Graco expects to witness challenges in multiple end markets and geographies in the first half of 2021. The company mentioned that conditions will be solid for the contractor and industrial segments in the year.

For 2021, it refrained from providing sales or earnings projections. On the contrary, it mentioned that capital expenditure for the year will be $140 million (including $90 million for the expansion of facilities).

Corporate expenses (unallocated) are estimated to be $30 million. Impacts of movements in foreign currencies are expected to boost sales and earnings by 2% and 5%, respectively, in the year.

Effective tax rate for the year is predicted to be 18-19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 9.79% due to these changes.

VGM Scores

Currently, Graco Inc. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Graco Inc. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.