Graco (GGG) Q2 Earnings Miss, Organic View Down on Macro Woes

Graco Inc. GGG reported weaker-than-expected results for the second quarter of 2019, with earnings and sales lagging respective estimates by 5.7% and 4.1%. This was the company’s second consecutive quarter of weak results, with negative earnings surprise of 4.08% recorded in the first quarter.

Adjusted earnings in the quarter under review were 50 cents per share, lagging the Zacks Consensus Estimate of 53 cents. However, the quarterly earnings declined 4.2% year over year due to forex woes and high costs of sales. However, lower tax expenses and roughly 2.7% fall in share count were a relief.

Organic Sales Drive Revenues, Forex Woes Play Spoilsport

In the reported quarter, Graco’s net sales were $428.3 million, witnessing a 0.9% increase from the year-ago quarter. Top-line results were driven by 3% positive impacts of volume and price, partially offset by 2% adverse impacts of unfavorable movements in foreign currencies.

However, the company’s net sales lagged the Zacks Consensus Estimate of $446.4 million.

On a geographical basis, quarterly sales generated from the Americas increased 3% or grew 4% at a constant currency rate. Sales in EMEA grew 4% or advanced 10% at a constant currency rate while sales from the Asia Pacific decreased 10% or were down 6% at a constant currency rate.

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

Industrial segment’s revenues totaled $188.5 million, representing 44% of net revenues in the quarter under review. On a year-over-year basis, the segment’s revenues declined 1% mainly due to 3% adverse impact of unfavorable movements in foreign currencies, partially offset by 2% positive impact of volume and price.

The Process segment’s sales of $85.1 million were flat compared with the year-ago quarter. It accounted for roughly 19.9% of net revenues in the reported quarter. Volume and price had positive impact of 1% in the quarter, offset by 1% adverse impact of forex woes.

The Contractor segment generated revenues of $154.8 million, accounting for roughly 36.1% of net revenues in the reported quarter. Sales increased 3.8% year over year on positive impacts of 5% from volume and price, offset by forex woes of 1%.

Margins Fall Y/Y

In the reported quarter, Graco’s cost of sales increased 3.4% year over year to $201.4 million. It represented 47% of the quarter’s net sales versus 45.9% in the year-ago quarter. Gross profit decreased 1.3% year over year to $227 million while margin decreased 120 basis points (bps) to 53%. Fall in margin was triggered by unfavorable product and channel mix, forex woes, and adverse factory volume. As noted, high costs of raw materials were offset by favorable pricing.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) decreased 1.7% year over year to $114.6 million. It represented 26.8% of net sales in the reported quarter versus 27.4% in the year-ago quarter.

Operating profit declined 0.9% year over year to $112.4 million, with a year-over-year decline of 50 bps in the margin to 26.2%. Interest expenses in the reported quarter decreased 11.8% year over year to $3.4 million. Adjusted tax rate in the quarter was 20.3%, down from 21.4% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting the second quarter, Graco had cash and cash equivalents of $180.9 million, up 51.1% from $119.7 million recorded in the last reported quarter. Long-term debt was up 3.1% sequentially to $179.1 million.

In the first half of 2019, the company generated net cash of $163.8 million from operating activities, roughly 4.1% below the year-ago figure. Capital spent on the addition of property, plant and equipment totaled $70.2 million versus $27.4 million in the year-ago period.

During the first half, the company distributed dividends worth $53.1 million and repurchased shares for $2.4 million. Notably, it did not repurchase any shares in the second quarter.

Outlook

Graco continues to work on its growth strategies while believes that challenging macro conditions will influence its results in 2019. Organic sales (at a constant currency rate) are predicted to increase in a low-single digit, down from mid-single-digit growth mentioned earlier.

Organic sales (at constant currency rates) are predicted to grow in a mid-single digit for the Americas and EMEA while likely to decline in a low-single digit for the Asia Pacific versus low-single-digit growth stated earlier.

The company predicts capital expenditure (excluding mortar and brick) to be $40 million in 2019. Also, spending on building projects to boost distribution and production capacity will likely be $110-$115 million. Corporate expenses (unallocated) are estimated to be $31 million.

Forex woes are predicted to adversely influence sales by 1.5% and earnings by 3% while high material costs and tariffs will have adverse impact of $25 million. Effective tax rate is predicted to be 20-21% for the year.

Graco Inc. Price, Consensus and EPS Surprise

 

Graco Inc. Price, Consensus and EPS Surprise

Graco Inc. price-consensus-eps-surprise-chart | Graco Inc. Quote

Zacks Rank & Stocks to Consider

With a market capitalization of roughly $8.5 billion, Graco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, DXPE Enterprises, Inc. DXPE and Dover Corporation DOV. While Roper and DXP Enterprises currently sport a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for these companies have improved for the current year. Further, average earnings surprise for the last four quarters was 8.43% for Roper, 48.47% for DXP Enterprises and 6.91% for Dover.

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