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Graco (GGG) Down 6.1% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Graco (GGG - Free Report) . Shares have lost about 6.1% 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 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 Q1 Earnings Lag, Down on Forex & Cost Woes

Graco reported weaker-than-expected results for the first quarter of 2019, with earnings and sales lagging respective estimates by 4.1% and 2.6%.

Adjusted earnings in the quarter under review were 47 cents per share, lagging the Zacks Consensus Estimate of 49 cents. Also, quarterly earnings decreased 2.1% from the year-ago figure of 48 cents due to forex woes and high costs. However, lower tax expenses and roughly 2.7% fall in share count were a relief.

Weak Industrial and Contractor Segments Affect Revenues

In the reported quarter, Graco's net sales were $404.9 million, reflecting 0.3% decline over the year-ago quarter. Top-line results were adversely impacted by unfavorable movements in foreign currencies by 2%, partially offset by approximately 2% organic growth.

Also, the top line lagged the Zacks Consensus Estimate of $415.9 million.

On a geographical basis, quarterly sales generated from the Americas increased 5% while sales in EMEA declined 2% or grew 5% at constant currency rates. Sales from the Asia Pacific decreased 12% or were down 8% at constant currency rates.

The company reports revenues under three market segments. A brief discussion of the quarterly results is provided below:

Industrial's revenues totaled $189.1 million, representing 46.7% of net revenues in the quarter under review. On a year-over-year basis, the segment's revenues declined 3.1% mainly due to unfavorable movements in foreign currencies. Organic sales and impact of acquisitions were flat in the reported quarter.

The Process segment generated revenues of $86.9 million, accounting for roughly 21.5% of net revenues in the reported quarter. Sales grew 8.6% year over year, primarily driven by 10% growth in organic sales, offset by 1% adverse impact of forex woes.

The Contractor segment generated revenues of $128.9 million, accounting for roughly 31.8% of net revenues in the reported quarter. Sales decreased 1.7% year over year due to 2% adverse impact of forex woes. Organic sales and impact of acquisitions were flat in the quarter.

High Costs and Forex Woes Hurt Margins

In the reported quarter, Graco's cost of sales increased 2.7% year over year to $188.8 million. It represented 46.6% of the quarter’s net sales versus 45.3% in the year-ago quarter. Gross margin decreased 130 basis points (bps) to 53.4% due to the increase in costs of raw materials, unfavorable product and channel mix, and forex woes, partially offset by favorable pricing.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 0.7% year over year to $111.5 million. The increase in expenses was mainly due to product launch costs and investments in product development. It represented 27.5% of net sales in the reported quarter versus 27.3% in the year-ago quarter.

Operating profit declined 6.4% year over year to $104.5 million, with year-over-year decline of 170 bps in the margin to 25.8%. Interest expenses in the reported quarter increased 9.3% year over year to $3.5 million. Adjusted effective tax rate in the quarter was 20.5%, down from 21.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the first quarter, Graco had cash and cash equivalents of $119.7 million, down 9.4% from $132.1 million recorded in the last reported quarter. Long-term debt was down 34.8% sequentially to $173.7 million.

In the reported quarter, the company generated net cash of $50.5 million from operating activities, roughly 14% below the year-ago figure. Capital spent on the addition of property, plant and equipment totaled $30.4 million versus $9 million in the year-ago quarter.

During the quarter under review, the company distributed $26.4 million worth dividends and repurchased shares for $2.4 million.

Outlook

For 2019, Graco anticipates benefiting from product launches in the Contractor segment as well as from pricing actions. Organic sales (at constant currency) are predicted to grow in a mid-single digit. Segmental and geographical results are also anticipated to flourish.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Graco has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 upward for the stock, and the magnitude of these revisions looks promising. Notably, Graco has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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