It has been about a month since the last earnings report for Graco Inc. (
GGG Quick Quote GGG - Free Report) . Shares have added about 0.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Graco Inc. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Graco Q2 Earnings Beat, Solid End-Markets to Favor 2H21
Graco reported impressive results for second-quarter 2021, with earnings surpassing the Zacks Consensus Estimate by 1.64%. Its sales also exceeded estimates by 6.19%.
Adjusted earnings in the quarter under review were 62 cents per share, one cent above the Zacks Consensus Estimate of 61 cents. On a year-over-year basis, earnings increased 67.6%, driven by healthy sales generation and improved margins. Revenue Details
In the reported quarter, the company’s net sales were $507.2 million, reflecting an increase of 38.2% from the year-ago quarter. Volume and price boosted sales by 35% and movements in foreign currencies had a positive impact of 4%. However, acquisitions and divestitures had an adverse impact of 1%.
The company’s net sales surpassed the Zacks Consensus Estimate of $478 million. On a geographical basis, quarterly sales generated from the Americas grew 33% to $302 million (or advanced 32% at a constant-currency rate). In the Europe, Middle East and Africa region, sales were $113.8 million, increasing 60% year over year (or grew 49% at a constant-currency rate), while sales from the Asia Pacific were $91.4 million, increasing 34% year over year (or up 25% 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 $204.6 million, reflecting a 53.4% increase from the year-ago quarter. Volume and price had a positive impact of 46% on sales, while movements in foreign currencies benefitted by 6% and acquisitions benefited results by 1%. The segment’s sales accounted for 40.3% of the company’s net revenues in the quarter. The Process segment’s sales of $97.2 million were up 25% from the year-ago quarter. The result was driven by a 29% gain from volume and price, and a 3% favorable impact of forex tailwinds. However, acquisitions and divestitures had an adverse impact of 7% in the quarter. The segment’s sales accounted for 19.2% of net revenues in the reported quarter. The Contractor segment’s revenues increased 31.8% year over year to $205.4 million. The improvement was driven by a 29% contribution from volume and price as well as movements in foreign currencies boosted it by 3%. The segment’s sales accounted for 40.5% of net revenues in the reported quarter. Margin Profile
In the reported quarter, Graco’s cost of sales grew 32% year over year to $243.3 million. It represented 48% of the quarter’s net sales versus 50.3% in the year-ago quarter. Gross profit increased 44.5% year over year to $263.8 million, while margin was up 230 basis points (bps) to 52%. The margin improvement was triggered by higher sales volume, forex tailwinds, and favorable channel mix and product. However, higher costs were spoilsports in the quarter.
Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 26.4% year over year to $130 million. It represented 25.6% of net sales in the reported quarter versus 28% in the year-ago quarter. Adjusted operating profit was at $133.8 million, reflecting a year-over-year increase of 67.7%. Operating margin, adjusted, increased 460 bps year over year to 26.4%. Interest expenses in the reported quarter decreased 22.4% year over year to $2.5 million. Effective tax rate (adjusted) in the quarter was 18%, down 110 bps from the prior-year quarter. Balance Sheet & Cash Flow
Exiting the second quarter, Graco had cash and cash equivalents of $482.8 million, reflecting a 4.8% increase from $460.6 million recorded in the last reported quarter. Long-term debt was unchanged sequentially at $150 million.
In the first half of 2021, the company generated net cash of $220.1 million from operating activities, reflecting growth of 54.4% from the year-ago period. Capital spent on the addition of property, plant and equipment totaled $54.8 million versus $32.6 million in the first half of 2020. The company distributed dividends worth $63.4 million in the first half of 2021, up 8.4% from the year-ago period. It refrained from repurchasing shares in the first six months of this year, while bought back $102.1 million worth of shares in the first half of 2020. Outlook
Graco expects to witness favorable conditions in the major end markets for the rest of 2021. Uncertainties related to the demand environment and supply-chain issues might be troubling. Comparisons for the Contractor segment are expected to be challenging in the second half.
For 2021, the company anticipates organic sales growth (on a constant-currency basis) to be in mid-to-high teens. It expects growth in all segments and geographical locations. It expects capital expenditure of $150 million (higher than $140 million mentioned earlier). The revised projection for the year includes $90 million for the expansion of facilities. Corporate expenses (unallocated) are estimated to be $30 million (maintained). The impacts of movements in foreign currencies are expected to boost sales and earnings by 2% and 5% (same as previously mentioned figure), respectively, in the year. Effective tax rate for the year is predicted to be 18-19% (maintained). The company also noted that its high-performance coatings and foam product offerings will be aligned with the Contractor segment, starting from Jan 1, 2022. The business is now part of the company’s Industrial segment’s Applied Fluid Technologies division. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
At this time, Graco Inc. has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Graco Inc. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.