Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: Mar 19, 2013; 4Q12 & FY12 Earnings Update
Brokers’ Recommendations: Neutral: 57.0% (4 firms); Positive: 43.0% (3); Negative: 0.00% (0) Prev. Ed.: 5; 2; 0
Brokers’ Target Price: $59.17 (↑2.97 from the last edition; 6 firms) Brokers’ Avg. Expected Return: (6.9%)
Portfolio Manager Executive Summary
Graco Inc. (GGG or the company) is a provider of fluid handling systems and components. The company’s products move, measure, control, dispense, and apply a wide range of fluids and viscous materials used in commercial and industrial fluid spraying applications and vehicle lubrication. Graco’s products are typically used for spray finishing, paint circulation, lubrication, and for applying sealants and adhesives in the automotive, industrial, housing, wood finishing, and other commercial markets.
Of all the firms in the Digest Group covering the stock, 57% assigned neutral ratings and 43.0% rendered positive ratings. None of the firms provided a negative rating on the stock. The target prices provided by the brokerage firms range between $48.00 and $67.00, with the average at $59.17.
Neutral or equivalent outlook – 4 firms or 57.0%: To these firms, Graco is one of the best companies with a capable team and strong business strategy. The company is continuously investing in its businesses to diversify and expand its product range. However, there are some lingering downsides, which make the firms apprehensive about the stock. The softness accruing from the Asia Pacific markets are expected to adversely affect Graco’s businesses moving ahead. Even though the company has growth prospects and appears proficient enough to face competition, its near-term situation seems cautious to these firms, due to which they maintain a sideline view for the time being on the stock.
Positive or equivalent outlook – 3 firms or 43.0%: These firms with an optimistic stance consider Graco to be well positioned to grow further in the long term with its product innovations, geographical diversification, Powder Finishing acquisition, capital redistribution, high operating margin, solid cash flow, and cost reduction strategies. Graco’s advanced services would help its clients increase their efficiency as well as trim production cost. Despite the prevailing macroeconomic conditions in Western Europe and Asia Pacific, Graco expects its new product developments, sales initiatives and expansions to drive modest growth in EMEA and Asia Pacific in 2013.
Jun7, 2013
Overview
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments· Graco’s management team provides strategic manufacturing expertise; one of its core competencies.
· The company provides pumping and spraying solutions, which assist the customers in reducing their labor, use of material and energy, thus improving quality and achieving environmental compliance.
· Graco has a capable management team, which has successfully integrated six companies in the time span of three years.
· The company invests in research and development, which quickens new product development.
· The company’s growth will be driven by international opportunities, which include the conversion of brushes to sprayers in emerging regions and upgrading manufacturing techniques in Asia. / · The company operates in a highly competitive and fragmented industry. Graco’s competitors include international, national or regional players. The competitors are ready to sacrifice their margins to gain market share, which would negatively affect Graco’s results.
· The firms believe that Graco’s Contractor division will continue to be adversely impacted by the sluggish U.S. residential construction. Graco’s results depend on general industrial end markets and U.S. industrial economy.
· The Contractor segment derives revenue from a few customers. Decline in the level of purchases by these customers could reduce the company’s sales.
· Graco has excess cash flow and it plans to channel it toward acquisitions. Thus, the company’s acquisition-oriented growth strategy faces additional pressure of realizing projected efficiencies and cost-savings from the acquired businesses. Failure of the same will negatively affect growth or profit objectives.
· Graco is subject to fluctuations in the exchange rates of international currencies where it operates .
Headquartered in Minneapolis, Minn, Graco Inc. supplies technology for management of fluids in both industrial and commercial applications. The company designs, manufactures, and markets systems that move, measure, control, dispense, and apply fluid materials. Its products are used for the application of paints and coatings, for the high-pressure cleaning of equipment, and for the lubrication and maintenance of vehicles and other equipment. It offers its products through distributors, integrators, original equipment manufacturers, auto parts stores, home centers, sales force, and direct sales generalists in North America, South America, Europe, the Middle East, Africa, and the Asia-Pacific. Graco operates in three segments: Industrial, Contractor, and Lubrication. The company’s fiscal year coincides with the calendar year. More information is available at the company’s website: www.graco.com.
Jun 7, 2013
Long-Term Growth
The company’s key growth drivers include the development and marketing of new products, expansion of the global distribution network, opening up of new markets with technology and channel expansion and the completion of strategic acquisitions. Further, Graco focuses on expansion of distribution outlets and penetration in developing markets.
Graco’s ongoing investment in fluid management and control will continue to provide innovative solutions to a diverse global market. The company strives for continuous improvement and excellence, which augurs well for its long-term growth.
The company’s acquisition of finishing businesses of Illinois Tool Works will strengthen Graco’s Industrial platform, given the inclusion of powder coating capability and complementary liquid finishing assets. Moreover, Graco will gain a leading position in the automotive refinishing industry with the addition of Illinois Tool Works.
Jun 7, 2013
Target Price/Valuation
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionNeutral / 57.0%
Positive / 43.0%
Negative / 0.0%
Avg. Target Price / $59.17
Digest High / $67.00
Digest Low / $48.00
Firms with Target Price/Total No. / 6/7
Risks to the target price include world economic condition, competition, foreign currency exchange rates, acquisition integration, limited near-term visibility, and rise in the cost of raw materials.
Recent Events
On Apr 24, 2013, Graco announced its financial results for 1Q13 earnings
Graco reported stellar 1Q13 results with earnings of $52.1 million or $0.84 per share versus $35.4 million or $0.58 per share in the year-ago quarter. The year-over-year increase in earnings was primarily attributable to the accretive acquisition of the Gema Powder Finishing business and superior growth in the contractor business in the Americas. The earnings in the reported quarter were well ahead of the Zacks Consensus Estimate of $0.73.
Net sales for 1Q13 came in at $269.0 million, up 15.0% year over year but missed the Zacks Consensus Estimate of $271 million. Quarterly sales increased 26% in Europe Middle East and Africa (EMEA), 10% in the Americas and 16% in Asia Pacific.
Revenue
Net sales for 1Q13 came in at $269.0 million, up 15.0% year over year. Quarterly sales increased 26% in Europe Middle East and Africa (EMEA), 10% in the Americas and 16% in Asia Pacific.
Segmental Revenue
Industrial: The Industrial segment provides equipment in four areas of application: sealant and adhesives, process, liquid finishing, and protective coatings.
The Industrial segment witnessed a 22% rise in sales to $164.2 million, driven by the Powder Finishing operations. On a geographic region basis, sales increased 3% in the Asia Pacific, while it decreased 8% in EMEA.
Contractor: The Contractor segment provides spray equipment for contractors in the painting, roofing, texture, corrosion control, and line striping markets.
Net sales in the Contractor segment increased 8% year over year to $77.6 million, largely due to the strong performance in the Americas.
Lubrication: The Lubrication segment provides products for fast oil change facilities, service garages, fleet service centers, automobile dealerships, and industrial lubrication.
During the reported quarter, the Lubrication segment recorded a 3% decline in net sales to $27.2 million as sales increases in the Americas and EMEA were offset by decrease in Asia Pacific with weak demand in the mining sector.
Overall Outlook
For 2013, management anticipates growth across all geographic regions. In the Americas, the company expects to benefit from the continued recovery in its Contractor and Industrial segments. Despite the prevailing macroeconomic conditions in Western Europe and Asia Pacific, Graco expects its new product developments, sales initiatives and expansions to drive modest growth in EMEA and Asia Pacific in 2013.
Margins
The company’s cost of products sold was $118.4 million in 1Q13 versus $101.9 million in 1Q12.
Gross margin came in at 56%, down 1.5 percentage points from the year-ago quarter, driven by lower margins from acquired Powder Finishing operations, partially offset by price increases and manufacturing cost improvements.
Selling, marketing, and distribution expenses were $43.4 million in 1Q13 versus $38.1 million in 1Q12. General and administrative expense was $23.4 million in 1Q13 versus $24.5 million in 1Q12.
Operating income for the industrial segment stood at $55.2 million in 1Q13 versus $48.3 million in 1Q12. Operating income for the contractor segment stood at $16.4 million in 1Q13 versus $12.5 million in 1Q12. Operating income for the lubrication segment stood at $27.2 million in 1Q13 versus $28.0 million in 1Q12.
Earnings per Share
Graco reported 1Q13 earnings of $52.1 million or $0.84 per share versus $35.4 million or $0.58 per share in the year-ago quarter. The year-over-year increase in earnings was primarily attributable to the accretive acquisition of the Gema Powder Finishing business and superior growth in the contractor business in the Americas.
StockResearchWiki.com – The Online Stock Research Community
Discover what other investors are saying about Graco Inc. at:
GGG profile on StockResearchWiki.com
Research Analyst / Meenu GoyalCopy Editor / Gourab Das
Content Ed. / Supriyo Bose
QCA / Supriyo Bose
Lead Analyst / Supriyo Bose
No. of brokers reported/Total brokers / 7/7
Reason for Update / 1Q13 Earnings Update
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