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Graco Inc. (GGG) Down 4.7% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Graco Inc. (GGG - Free Report) . Shares have lost about 4.7% in that time frame, outperforming 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 catalysts.

Graco Beats on Q4 Earnings & Sales, Faces Cost Woes

Graco reported impressive fourth-quarter 2021 results. The company’s earnings surpassed the Zacks Consensus Estimate by 3.13%. Its sales beat in the quarter was 3.26%.

In the reported quarter, the company’s adjusted earnings were 66 cents per share, surpassing the Zacks Consensus Estimate of 64 cents. The bottom line increased 8.2% from the year-ago quarter’s figure of 61 cents, mainly on sales growth. High costs and expenses played spoilsports and hurt margins.

In 2021, the company’s adjusted earnings were $2.44 per share, increasing 25.1% from the previous year’s figure of $1.95. Also, the bottom line surpassed the Zacks Consensus estimate of $2.41.

Revenue Details

In the quarter under review, the company’s net sales were $539.6 million, reflecting year-over-year growth of 14.7%. Results were driven by solid segmental performances. Volume growth and effective pricing contributed to sales growth.

The company’s top line surpassed the Zacks Consensus Estimate of $523 million.

On a regional basis, quarterly sales generated from the Americas grew 13% to $303 million. In the Europe, the Middle East and Africa region, sales were $125 million, increasing 4% year over year (or up 8% at a constant currency rate), while sales from the Asia Pacific were $112 million, increasing 34% (or up 33% at a constant currency rate).

It reports net sales under three segments, namely Industrial, Process and Contractor. The segmental information is briefly discussed below:

Revenues for the Industrial segment totaled $239.9 million, rising 12.7% year over year on the back of improved economic activities. Acquisitions contributed 1% to sales growth, while foreign-currency translations lowered sales by 1%. Core sales grew 13% year over year.

Revenues in the Process segment grossed $112.8 million, increasing 35.1% year over year. The improvement came on the back of a 35% rise in core sales driven by healthy business activities across all regions served.

Revenues in the Contractor segment totaled $186.9 million, up 7.5% year over year. Core sales expanded 8% and foreign currency translation had a negative impact of 1%. The core sales improvement was driven by healthy demand in the Asia Pacific and EMEA regions. Also, improved construction markets boosted business in North America.

In 2021, the company’s revenues totaled $1.99 billion, reflecting an increase of 20.5% from the previous year. Also, the top line surpassed the Zacks Consensus Estimate of $1.97 billion.

It is worth noting that Graco will start reporting its high-performance coatings and foam product offerings under the Contractor segment starting first-quarter 2022. Earlier, these businesses were reported under the Industrial segment’s Applied Fluid Technologies division.

Margin Profile

In the fourth quarter, Graco’s cost of sales grew 17.5% year over year to $265.1 million. It represented 49.1% of the quarter’s net sales versus 48% in the year-ago quarter. The gross profit increased 12.1% to $274.6 million, while the margin was down 120 basis points (bps) to 50.9%. The margin weakness was triggered by a product cost increase caused by inflationary and supply-chain woes. This was partially offset by higher production volume and favorable channel and product mix and price realization.

The company noted that gross profit was lowered by $16 million due to an increase in freight, material and labor costs.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 15.3% year over year to $130 million. It represented 24.1% of net sales in the reported quarter versus 24% in the year-ago quarter.

Adjusted operating income increased 9.5% year over year to $144.6 million. The operating margin decreased 130 bps to 26.8% in the quarter. Interest expenses in the quarter totaled $2.8 million, up 7.3%. Adjusted tax rate in the quarter was 18.1%.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Graco had cash and cash equivalents of $624.3 million, up 3.4% from $603.8 million at the end of the last reported quarter. The long-term debt balance decreased 50% sequentially to $75 million.

Graco generated net cash of $456.9 million from operating activities in 2021, reflecting a year-over-year increase of 16%. Capital used for purchasing property, plant and equipment totaled $133.6 million compared with $71.3 million in the previous year.

The company paid out dividends worth $127.1 million to its shareholders in 2021, up 8.7% from the previous year. However, the company refrained from repurchasing any shares in the year.

Outlook

Graco expects to witness healthy demand across regions and segments in 2022. Supply-chain issues (related to component availability) and logistic problems will be troublesome in the first half of the year. Effective pricing actions will be beneficial.

For 2022, the company anticipates organic sales growth (on a constant currency basis) in the high-single digit.

The company expects capital expenditure of $190 million, including $140 million for the expansion of facilities. Corporate expenses (unallocated) are estimated to be $28-$30 million. The impacts of movements in foreign currencies are expected to lower sales by 1% and earnings by 3% in the year.

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

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Graco Inc. has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Graco Inc. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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