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Graco (GGG) Surpasses Earnings and Sales Estimates in Q3

Zacks Equity Research
·6-min read

Graco Inc. GGG reported impressive results for third-quarter 2020. Its earnings beat the Zacks Consensus Estimate by 40.5%, while sales surpassed the same by 14.2%. Notably, the bottom- and top-line results also improved from the year-ago quarter.

Adjusted earnings in the quarter under review were 59 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. On a year-over-year basis, earnings increased 31.1%, driven by healthy sales generation and improved margins.

Revenue Details

In the reported quarter, the company’s net sales were $439.3 million, suggesting a 9.7% increase from the year-ago quarter. Volume and price boosted sales by 8%, acquisition added 1%, and movements in foreign currencies had a positive impact of 1%.

Also, the company’s net sales surpassed the Zacks Consensus Estimate of $384.8 million.

On a geographical basis, quarterly sales generated from the Americas grew 14% to $277 million. In the Europe, Middle East and Africa (EMEA) region, sales were $93 million, decreasing 1% year over year (or slipped 5% at a constant-currency rate), while sales from the Asia Pacific were $69 million, increasing 9% year over year (or up 7% 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 $172.8 million, reflecting a 1.3% decline from the year-ago quarter. Volume and price had an adverse impact of 3% on sales, while movements in foreign currencies benefitted by 2%. The segment’s sales accounted for 39.3% of the company’s net revenues in the quarter.

The Process segment’s sales of $78.8 million were down 6.3% from the year-ago quarter. Acquisitions contributed 5% to sales growth, while volume and price had an adverse impact of 12% in the quarter. Movements in foreign currencies increased sales by 1%. The segment’s sales accounted for 18% of net revenues in the reported quarter.

During the quarter, the company completed the divestment of its valve business based in the U.K.

The Contractor segment’s revenues increased 32.7% year over year to $187.7 million. The improvement was driven by a 32% contribution from volume and price as well as movements in foreign currencies boosted it by 1%. The segment’s sales accounted for 42.7% of net revenues in the reported quarter.

The company noted that demand was strong from home center and professional paint channels.

Margin Profile

In the reported quarter, Graco’s cost of sales grew 8.9% year over year to $210.4 million. It represented 47.9% of the quarter’s net sales versus 48.2% in the year-ago quarter. Gross profit increased 10.4% year over year to $229 million, while margin was up 30 basis points (bps) to 52.1%. The improvement in margin was triggered by a fall in product costs and price realization. However, channel and product mix were spoilsports in the quarter.

Operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) edged down 0.3% year over year to $103.7 million. It represented 23.6% of net sales in the reported quarter versus 26% in the year-ago quarter.

Adjusted operating profit increased 21.2% year over year to $125.3 million on the back of rise in volume and positive impacts from foreign currency movements. Operating margin, adjusted, increased 270 bps year over year to 28.5%.

Interest expenses in the reported quarter decreased 18.1% year over year to $3 million. Effective tax rate (adjusted) in the quarter was 16.1%, down 3.9 percentage points from the previous-year quarter.

Balance Sheet & Cash Flow

Exiting the third quarter, Graco had cash and cash equivalents of $424.7 million, suggesting a 1.9% decrease from $432.7 million recorded in the last reported quarter. Long-term debt slipped 31.3% sequentially at $275 million.

In the first three quarters of 2020, the company generated net cash of $262.7 million from operating activities, reflecting a decline of 112.3% from the year-ago comparable period. Capital spent on the addition of property, plant and equipment totaled $45.8 million versus $102.5 million in the first three quarters of 2019.

The company distributed dividends worth $87.7 million and repurchased shares worth $102.1 million during the first three quarters of 2020.

Outlook

In the near term, Graco seems well-equipped with operations running globally, efficient management team, a sound customer base and a focus on keeping the production lines active. Solid demand in the Contractor segment is advantageous, while end-market uncertainties in the Industrial and Process segments still prevail.

For 2020, the company refrained from providing sales or earnings projections. On the contrary, it did mention that capital expenditure for the year is now expected to be $85 million (including $50 million for the expansion of facilities), up from $80 million mentioned earlier.

Corporate expenses (unallocated) are estimated to be $30 million (maintained). Impacts of movements in foreign currencies are expected to be nil in the year, while the same will likely boost fourth-quarter sales and earnings by 2% and 3%, respectively.

Effective tax rate for both the fourth quarter and 2020 is predicted to be 18-19%.

Graco Inc. Price, Consensus and EPS Surprise

 

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 & Other Stocks to Consider

With a market capitalization of $10.9 billion, Graco currently carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the industry are Kaman Corporation KAMN, Altra Industrial Motion Corp. AIMC and IDEX Corporation IEX. While Kaman presently sports a Zacks Rank #1 (Strong Buy), both Altra Industrial and IDEX carry a Zacks Rank #2. 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, earnings surprise for the last reported quarter was 71.43% for Kaman, 76.47% for Altra Industrial and 8.91% for IDEX.

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