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Graco Inc. (GGG) Down 2.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Graco Inc. (GGG - Free Report) . Shares have lost about 2.7% 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 the most recent earnings report in order to get a better handle on the important drivers.

Graco Misses on Q1 Earnings & Sales, Faces Cost Woes

Graco Inc. has reported lackluster first-quarter 2022 results. GGG’s earnings missed the Zacks Consensus Estimate by 9.5%. Its sales missed the same by 4.4%.

In the reported quarter, Graco’s adjusted earnings were 57 cents per share, missing the Zacks Consensus Estimate of 63 cents. The bottom line decreased 1.7% from the year-ago quarter’s figure of 58 cents, mainly due to lower sales. High costs and expenses were headwinds and hurt margins.

Revenue Details

In the quarter under review, GGG’s net sales were $494.3 million, reflecting year-over-year growth of 9%. Results were driven by solid segmental performances. Volume growth and effective pricing contributed to sales growth.

Graco’s top line missed the Zacks Consensus Estimate of $517 million.

On a regional basis, quarterly sales generated from the Americas grew 11% to $293 million. In the Europe, the Middle East and Africa region, sales were $106 million, decreasing 4% year over year (or up 2% at constant currency rate), while sales from the Asia Pacific were $95 million, increasing 20% (or up 22% at constant currency rate).

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

Revenues for the Industrial segment totaled $144.7 million (contributing to 29.3% of the quarter’s sales), rising 11% year over year on the back of improved economic activities. Adverse foreign-currency translations lowered sales by 3%. Core sales grew 14% year over year.

Revenues in the Process segment grossed $115.0 million (contributing to 23.3% of the quarter’s sales), increasing 26% year over year. The improvement came on the back of a 26% rise in core sales, driven by healthy business activities across all regions served.

Revenues in the Contractor segment totaled $234.6 million (contributing to 47.4% of the quarter’s sales), up 1% year over year. Core sales expanded 1%, acquisitions had a positive impact of 1% but 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.

It is worth noting that Graco started 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 first quarter, Graco’s cost of sales grew 15.9% year over year to $240 million. GGG represented 48.6% of the quarter’s net sales compared with 45.6% in the year-ago quarter. The gross profit increased 2.8% to $254 million, while the margin was down 300 basis points (bps) to 51.4%. The margin weakness was triggered by a product cost increase, caused by inflationary and supply-chain woes. This was partially offset by a higher production volume and a favorable channel and product mix plus price realization.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 6% year over year to $44 million. The same represented 8.9% of net sales in the reported quarter compared with 8.1% in the year-ago period.

Adjusted operating income was flat year over year with $128 million. The operating margin decreased 230 bps to 25.9% in the quarter. Interest expenses in the quarter totaled $5.2 million compared with $2.4 million reported in the year-ago period. Adjusted tax rate in the quarter was 19%.

Balance Sheet and Cash Flow

Exiting the first quarter, Graco had cash and cash equivalents of $380 million, down 39.1% from $624 million at the end of the last reported quarter. The long-term debt balance was flat sequentially with $75 million.

Graco generated net cash of $31 million from operating activities in the first three months of 2022 compared with $102 million generated in the year-ago period. Capital used for purchasing property, plant and equipment totaled $47 million compared with $21 million in the year-ago period.

GGG paid out dividends worth $36 million to its shareholders in the first three months of 2022, up 13.3% from the previous-year quarter’s level. Graco repurchased shares worth $109 million in the first three months of 2022.

Outlook

Graco expects healthy demand across regions and segments in 2022. Effective pricing actions will be beneficial.

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

Graco expects capital expenditure of $190 million, including $140 million for the expansion of facilities. Corporate expenses (unallocated) are estimated to be $30-$32 million. The unfavorable impacts of movements in foreign currencies are expected to lower sales by 2% and earnings by 4% 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

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.

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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