Strength in Industrial Unit Aids Graco (GGG), High Costs Ail
Graco Inc. GGG is gaining from strength in the Industrial and Process segments. Improved project activity in the Asia Pacific region is aiding the Industrial segment. Solid momentum in most business units and across all reportable regions, led by double-digit growth in vehicle services and semiconductors, is driving the Process segment.
Also, the company’s diversified business structure, with exposure to various end markets like general industrial, automotive, alternative energy, pharma, food & beverage, vehicle services, oil & natural gas, environmental & transportation, infrastructure and others, helps offset weaknesses associated with a single market. For 2023, GGG predicts organic sales growth (on a constant-currency basis) to be in the low-single digits.
Strong price realization, along with favorable product and channel mix, is driving Graco’s margin performance. Graco’s gross margin increased 490 basis points in the third quarter of 2023.
Investments in capacity expansion and product innovation are aiding Graco’s performance. In 2023, the company anticipates capital expenditures to be approximately $200 million, including $130 million for facility expansion projects at its Minnesota, South Dakota, Switzerland and Romania facilities. As for innovation, GGG introduced a hot melt adhesive dispense system, the InvisiPac HM10 and electric-powered airless gun and Ultra QuickShotearlier in 2023.
The company continues to increase shareholders’ value through dividend payments and share buybacks. In the first nine months of 2023, Graco paid out dividends worth $118.7 million to its shareholders, up 11.1% year over year. It repurchased common stocks worth $27.1 million in the same period. GGG hiked its quarterly dividend by 11.9% to 23.5 cents per share in December 2022.
However, weakness in the Contractor segment, arising from reduced demand from slower economic activity in worldwide construction markets, raises concerns for GGG. Also, lower demand in the shipping container business and construction markets is adversely affecting sales in the segment’s Asia Pacific region.
Escalating costs and expenses have been a concern for GGG over time. In the first nine months of 2023, Graco’s selling, marketing and distribution costs increased 4.2% from the year-ago period. General and administrative expenses jumped 8.3% year over year in the same period. Operating expenses also increased 6%, year over year, in the first nine months due to incremental share-based compensation. Escalating costs, if left unchecked, may negatively impact profitability in the quarters ahead.
Given GGG’s extensive presence across international markets, its operations are subject to risks associated with unfavorable movement in foreign currencies and geopolitical issues. In the first nine months of 2023, foreign currency translation had a negative impact of 1% on the Process segments’ sales. Also, in the same period, Graco’s top-line performance in the Asia-Pacific region was adversely impacted by 4% due to unfavorable movements in foreign currencies.
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In the past year, this Zacks Rank #3 (Hold) stock has gained 15% compared with the industry’s 6.8% growth.
Stocks to Consider
Some better-ranked companies from the Industrial Products sector are discussed below:
Flowserve Corporation FLS presently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
FLS delivered a trailing four-quarter average earnings surprise of 27.3%. In the past 60 days, the Zacks Consensus Estimate for Flowserve’s 2023 earnings has increased 3.1%. The stock has risen 19.7% in the past year.
Applied Industrial Technologies, Inc. AIT presently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter average earnings surprise of 13.9%.
The consensus estimate for AIT’s fiscal 2024 earnings has increased 3.7% in the past 60 days. Shares of Applied Industrial have jumped 22.7% in the past year.
A. O. Smith Corporation AOS currently carries a Zacks Rank of 2. The company delivered a trailing four-quarter average earnings surprise of 14%.
In the past 60 days, the consensus estimate for A. O. Smith’s 2023 earnings has improved 5%. The stock has risen 22.7% in the past year.
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A. O. Smith Corporation (AOS) : Free Stock Analysis Report
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Graco Inc. (GGG) : Free Stock Analysis Report
