Why Is Graco Inc. (GGG) Up 2.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Graco Inc. (GGG). Shares have added about 2.7% in that time frame, underperforming 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 Lags on Q3 Earnings & Sales, Keeps Organic View

Graco has reported weaker-than-expected results for third-quarter 2021, with earnings lagging the Zacks Consensus Estimate by 10.94%. The earnings disappointment came in after five consecutive earnings beats. Its sales also lagged estimates by 1.12%.

Adjusted earnings in the quarter under review were 57 cents per share, lagging the Zacks Consensus Estimate of 64 cents. On a year-over-year basis, earnings decreased 3.4% as the impacts of higher sales generation were offset by logistics, raw material and supply-chain issues. The margin also declined in the quarter on a year-over-year basis.

Revenue Details

In the reported quarter, the company’s net sales were $486.7 million, reflecting an increase of 10.8% from the year-ago quarter. Volume and price boosted sales by 9%. Movements in foreign currencies had a positive impact of 2%.

The company’s net sales lagged the Zacks Consensus Estimate of $492.2 million.

On a geographical basis, quarterly sales generated from the Americas grew 1.2% to $280.4 million (or advanced 1% at a constant-currency rate). In the Europe, Middle East and Africa region, sales were $115 million, increasing 23.7% year over year (or grew 20% at a constant currency rate), while sales from the Asia Pacific were $91.3 million, increasing 31.9% year over year (or up 27% 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 $211 million, reflecting a 22.1% increase from the year-ago quarter. Volume and price had a positive impact of 19% on sales, while movements in foreign currencies benefitted results by 2% and acquisitions benefited by 1%. The segment’s sales accounted for 43.4% of the company’s net revenues in the quarter.

The Process segment’s sales of $96.2 million were up 22.1% from the year-ago quarter. The result was driven by a 21% gain from volume and price, and a 1% favorable impact of forex tailwinds. The segment’s sales accounted for 19.8% of net revenues in the reported quarter.

The Contractor segment’s revenues decreased 4.4% year over year to $179.5 million. The weakness stemmed from a 5% decline in sales due to volume and price, offset by a 1% positive contribution from foreign currency movements. The segment’s sales accounted for 36.8% of net revenues in the reported quarter.

Margin Profile

In the reported quarter, Graco’s cost of sales grew 13.4% year over year to $238.5 million. It represented 49% of the quarter’s net sales versus 47.88% in the year-ago quarter. The gross profit increased 8.4% year over year to $248.2 million, while the margin was down 110 basis points (bps) to 51%. 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, forex tailwinds, and favorable price realization.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) increased 19.2% year over year to $123.6 million. It represented 25.4% of net sales in the reported quarter versus 23.6% in the year-ago quarter.

Adjusted operating profit was at $124.6 million, reflecting a year-over-year decline of 0.6%.  Operating margin, adjusted, decreased 290 bps year over year to 25.6%.

Interest expenses in the reported quarter decreased 15.7% year over year to $2.5 million. The effective tax rate (adjusted) in the quarter was 17.6%, up 150 bps from the prior-year quarter.

Balance Sheet & Cash Flow

Exiting the third quarter, Graco had cash and cash equivalents of $603.8 million, reflecting a 25.1% increase from $482.8 million recorded in the last reported quarter. Long-term debt was unchanged sequentially at $150 million.

In the first three quarters of 2021, the company generated net cash of $357.2 million from operating activities, reflecting growth of 36% from the year-ago period. Capital spent on the addition of property, plant and equipment totaled $82.6 million versus $45.8 million in the first three quarters of 2020.

The company distributed dividends worth $95.2 million in the first three quarters of 2021, up 8.6% from the year-ago period. It refrained from repurchasing shares in the first nine months of this year, while buying back $102.1 million worth of shares in the first three quarters of 2020.

Outlook

Graco expects to witness healthy demand in all end markets and geographical locations for the rest of 2021. Uncertainties related to the 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 the mid-to-high teens. It expects demand growth for all end markets and geographical locations.

The company expects a capital expenditure of $150 million, including $80 million for the expansion of facilities. Corporate expenses (unallocated) are estimated to be $26-$28 million (down from $30 million mentioned previously). The impacts of movements in foreign currencies are expected to boost sales by 2% and earnings by 4% (down from 5% previously mentioned) in the year.

The 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?

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

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. 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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