Graco (GGG) Suffers From Macro Uncertainties & Margin Woes

Graco Inc. GGG seems to have lost its sheen to challenging macro conditions, inflation in material price and forex woes. Also, weak price performance and lowered earnings estimates are reflective of bearish sentiments for the stock.

The company engages in the manufacturing of equipment and systems used to measure, move, control, spray and dispense fluid as well as powder materials. It has a market capitalization of $8.1 billion and a Zacks Rank #4 (Sell) at present.

The company belongs to the Zacks Manufacturing – General Industrial industry, currently at the bottom 19% (with the rank of 204) of more than 250 Zacks industries. We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies, softness in the housing market and weakness in industrial production in the United States. Cost escalation, resulting from tariff woes as well as commodity inflation, and high labor costs and freight charges are also affecting the industry.

Notably, Graco’s third-quarter 2019 results were weaker than expected, with earnings lagging estimates by 11.76%. Also, the bottom line declined 10% year over year due to weakness in the Asia Pacific, forex woes and low margins. It has an earnings surprise of negative 5.38%, on average, for the last four quarters.

Over the past three months, the company’s shares have gained 9.1% compared with the industry’s growth of 12.7%.

Factors Affecting Investment Appeal

Top-Line Weakness: In third-quarter 2019, Graco’s organic sales declined 3% year over year due to weak volume and prices. For the rest of 2019, the company is wary about the adverse impacts of challenging macro conditions.

It anticipates flat organic sales (at constant currency rates) in 2019 versus low-single-digit growth stated previously.

For the Americas, the company expects organic sales to be flat to grow in a low-single digit, down from mid-single-digit growth mentioned previously. Further, it anticipates organic sales in the Asia Pacific to decline in double-digits as compared with previously mentioned low-single-digit decline.

Margin-Related Issues: We believe that high costs (resulting from tariffs and hike in raw-material costs), unfavorable volumes and other woes might impact Graco’s margin in the near term. In the third quarter of 2019, the company recorded a decline of 140 basis points (bps) in gross margin due to forex woes, unfavorable product and channel mix, and adverse factory volume.

For fourth-quarter 2019, Graco believes that unfavorable factory volume will lower gross margin by 75-80 bps.

Forex Woes: Geographical diversification, with a significant presence in China, the United States, Belgium, Japan, China, Australia and other countries, has exposed Graco to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. Notably, unfavorable movements in foreign currencies adversely impacted the company’s sales by 2% in the third quarter of 2019.

For 2019, Graco expects forex woes to reduce sales by 2% versus 1.5% stated earlier. The sames is predicted to hurt earnings by 4% versus 3% mentioned previously.

Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Graco’s earnings has been lowered in the past 60 days. The consensus estimate for earnings per share is currently pegged at $1.81 for 2019 and $1.86 for 2020, reflecting respective declines of 5.2% and 9.3% from the 60-day-ago figures.

Also, earnings estimates for fourth-quarter 2019 and first-quarter 2020 were declined 9.3% to 39 cents and 8.2% to 45 cents from the respective 60-day-ago figures.

Graco Inc. Price and Consensus

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