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Graco Inc. GGG has suffered and lost its growth momentum to the uncertainties related to the pandemic. It also faces headwinds from margin-related issues and forex woes. Notably, the company’s price performance has been weak and its earnings estimates have also been lowered lately, pointing toward bearish sentiments for the stock.
The company has a market capitalization of $8.1 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Manufacturing - General Industrial industry, currently at the bottom 29% (with the rank of 180) of more than 250 Zacks industries.
In first-quarter 2020, the company’s earnings and sales lagged estimates by 13.6% and 5.6%, respectively. However, on a year-over-year basis, its earnings declined 19.1% on weak revenue generation and a fall in margins.
Year to date, the company’s shares have fallen 6.7% compared with the industry’s decline of 9.3%.
Factors Affecting Investment Appeal
Pandemic-Related Woes: Graco suffered from the adverse impacts of the pandemic in first-quarter 2020. Its sales in the quarter declined 7.7% year over year, with organic sales falling 8%. The performance was weak in the Asia Pacific; Europe, Middle East and Africa; and the Americas. Also, the company’s sales declined in the Industrial and Process segments, while were flat year over year in the Contractor segment.
For 2020, the company believes that the pandemic-related uncertainties will continue impacting its operations. Projections for the year have been suspended. However, its solid product offerings and capacity-expansion efforts might provide support.
The Zacks Consensus Estimate for the company’s revenues is pegged at $318.5 million for the second quarter and $1.4 billion for 2020, suggesting declines of 25.6% and 14% from the year-ago reported numbers, respectively.
Margin-Related Issues: The company’s gross and operating margins declined 20 basis points (bps) and 180 bps year over year in the first quarter of 2020, respectively. Weak factory volume, forex woes, and unfavorable channel and product mix played spoilsport for the gross margin in the quarter. The headwinds, in case of persistence, might impact the company’s margins. Also, costs and expenses, if unchecked, might hurt results. Corporate expenses are predicted to be $30 million in 2020.
In addition, the company expects margin-headwinds from capital investments, marketing initiatives, new products and acquisitions in the second quarter.
Woes Related to International Presence: The company has a diversified business structure, having operations in multiple countries, including Switzerland, Italy, the United States, Romania, Belgium, the U.K. and China.
The diversification has exposed it to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. In the first quarter, the company’s sales declined 1% year over year on forex woes.
Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Graco’s earnings has moved downward in the past 60 days. The consensus estimate for earnings is currently pegged at $1.32 for 2020 and $1.65 for 2021, suggesting respective declines of 2.2% and 1.2% from the 60-day-ago numbers. Notably, one downward revision each was recorded for the years in the past two months.
Graco Inc. Price and Consensus
Graco Inc. price-consensus-chart | Graco Inc. Quote
Also, estimates for the second quarter of 2020 stood at 25 cents per share, marking a decline of 13.8% from the 60-day-ago number. One downward revision was recorded for the quarter during the period.
Stocks to Consider
Three better-ranked stocks in the industry are Applied Industrial Technologies, Inc. AIT, Altra Industrial Motion Corp. AIMC and Chart Industries, Inc. GTLS. While Applied Industrial sports a Zacks Rank #1 (Strong Buy), Altra Industrial and Chart Industries 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 stocks have improved for the current year. Further, positive earnings surprise for the last reported quarter was 2.00% for Applied Industrial, 47.73% for Altra Industrial and 16.33% for Chart Industries.
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