Here's Why Investors Should Avoid Investing in Graco Stock Now

Net profit, also referred to as the bottom line, is one of the key tools to determine the financial health of an enterprise. The metric demonstrates a company’s ability to convert per-dollar sales into profits.

A low profit margin indicates higher risks, implying that a revenue drop might dampen profits, thus pushing a company into the red. Graham Corporation GHM, Qifu Technology, Inc. QFIN, Adtalem Global Education Inc. ATGE and Strategic Education, Inc. STRA, however, boast solid net profit margins.

Net Profit Margin = Net profit/Sales * 100

In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. In fact, net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.

Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric not only attracts investors but also draws well-skilled employees who eventually enhance business value.

Moreover, a higher net profit margin compared with peers provides a company with a competitive edge.

Pros and Cons

Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

However, net profit margin, as an investment criterion, has its share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that important for technology companies.

In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.

Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.

Apart from these, we have added a few criteria to ensure maximum returns from this strategy.

Screening Parameters

Net Margin 12 months – Most Recent (%) greater than equal to 0: A high net profit margin indicates solid profitability.

Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.

Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the stock.

Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments.

VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here we discuss our four picks from the 26 stocks that qualified the screen:

Graham designs and builds vacuum and heat transfer equipment for process industries and energy markets worldwide. The company's products include steam jet ejector vacuum systems and liquid ring vacuum pumps, surface condensers, Heliflows, water heaters and various types of heat exchangers. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Graham’s fiscal 2025 earnings has been revised upward by 8 cents to $1.03 per share in the past seven days. GHM surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 101.9%.

Qifu Technology is a credit-tech platform principally in China that provides a comprehensive suite of technology services to assist financial institutions and consumers and small & medium enterprises in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. The stock has a Zacks Rank of 1 at present and a VGM Score of B.

The Zacks Consensus Estimate for Qifu Technology’s 2024 earnings has been revised downward to $5.04 per share from $5.08 in the past 30 days. QFIN surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 8.6%.

Adtalem Global Education is a leading healthcare education provider and workforce solutions innovator. Currently, the stock carries a Zacks Rank #2 and has a VGM Score of A.

The Zacks Consensus Estimate for Adtalem Global Education’s fiscal 2025 earnings has been revised upward by 9 cents to $5.81 per share in the past 30 days. ATGE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 19.5%.

Strategic Education, through its subsidiaries Strayer University and New York Code and Design Academy (NYCDA), provides a range of post-secondary education and other academic programs in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B.

The Zacks Consensus Estimate for Strategic Education’s 2024 earnings has been revised upward by 11 cents to $4.76 per share in the past seven days. STRA surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 40.4%.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance_disclosure/.

Zacks Investment Research

Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. But finding a great growth stock is not easy at all.

In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing from a stock whose growth story is actually over or nearing its end.

However, the task of finding cutting-edge growth stocks is made easy with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.

Our proprietary system currently recommends Graham (GHM) as one such stock. This company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Studies have shown that stocks with the best growth features consistently outperform the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.

While there are numerous reasons why the stock of this maker of vacuum and heat-transfer equipment is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Graham is 8.8%, investors should actually focus on the projected growth. The company's EPS is expected to grow 145.2% this year, crushing the industry average, which calls for EPS growth of 3.6%.

Impressive Asset Utilization Ratio

Growth investors often overlook asset utilization ratio, also known as sales-to-total-assets (S/TA) ratio, but it is an important feature of a real growth stock. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Right now, Graham has an S/TA ratio of 0.83, which means that the company gets $0.83 in sales for each dollar in assets. Comparing this to the industry average of 0.76, it can be said that the company is more efficient.

While the level of efficiency in generating sales matters a lot, so does the sales growth of a company. And Graham is well positioned from a sales growth perspective too. The company's sales are expected to grow 11.8% this year versus the industry average of 0%.

Promising Earnings Estimate Revisions

Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

There have been upward revisions in current-year earnings estimates for Graham. The Zacks Consensus Estimate for the current year has surged 8.4% over the past month.

Bottom Line

Graham has not only earned a Growth Score of A based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #1 because of the positive earnings estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination indicates that Graham is a potential outperformer and a solid choice for growth investors.

Zacks Investment Research

Applied Industrial Technologies, Inc. AIT is well-poised for growth in the coming quarters, courtesy of its improving product line and value-added services. The company's efforts to reward its shareholders handsomely add to its appeal.

Applied Industrial is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. These products are mainly sold to original equipment manufacturers (OEMs) and maintenance, repair and operations customers in Australia, North America, Singapore and New Zealand.

AIT currently carries a Zacks Rank #3 (Hold). In the past year, the stock has gained 64% compared with the industry’s 34.8% growth.

Let’s discuss the factors that should influence investors to retain this company for the time being.

Business Strength: Applied Industrial is poised for growth on the back of strength across its served markets of food and beverage, primary metals, utilities, transportation, aggregates and technology. The strong position in these markets, sales initiatives and focus on national customer accounts are driving the Service Center Based Distribution segment. The increase in demand for fluid power MRO services across the U.S. manufacturing sector, driven by growing digitization and higher investment in maintenance operations, is supporting the segment’s revenues.

Expansion Initiatives: AIT solidified its product portfolio and leveraged business opportunities through asset additions. In first-quarter fiscal 2025 (ended September 2024), buyouts had a positive impact of 2% on the company's sales. Acquisitions boosted sales by 0.7% and 4.7% for the Service Center-Based Distribution and Engineered Solutions segments in the fiscal fourth quarter, respectively. In May 2024, Applied Industrial acquired Grupo Kopar, thereby enhancing its automation position in North America.

The acquisitions of Bearing Distributors and Cangro (September 2023) enhanced the company’s footprint and strategic growth initiatives across the U.S. Southeast and upper Northeast regions. The Advanced Motion Systems Inc. (April 2023) buyout expanded its footprint in the upper Northeast region of the United States, while helping to bolster relationships with leading suppliers. The acquisition of Automation, Inc. (November 2022) expanded Applied Industrial’s footprint across key verticals and geographies, while supplementing its value-added services and cross-selling efforts.

Rewards to Shareholders: Applied Industrial has a strong balance sheet that has enabled it to reward its shareholders handsomely through dividend payments and share buybacks. In the first three months of fiscal 2025, it paid out dividends worth $14.2 million, up 4.9% on a year-over-year basis. In fiscal 2024, Applied Industrial rewarded shareholders with dividends of $55.9 million, up 4.6% year over year. The company hiked its quarterly dividend rate by 5.7% in January 2024. In August 2022, its board of directors authorized a new share buyback program to repurchase up to 1.5 million shares of its common stock. As of Sept. 30, 2024, it was left with repurchasing 1,050,000 shares.

Downsides of AIT

Segmental Weakness: Lower sales in the fluid power components, owing to weak demand across off-highway mobile OEM customers, are adversely impacting the performance of the Engineered Solutions segment. Also, softer flow control and automation product sales have been impacting the segment’s performance.

Rising Costs: Applied Industrial has been experiencing rising costs and expenses for a while. During the first quarter of fiscal 2025, the company witnessed a 3.7% year-over-year increase in SG&A expenses (including depreciation). The SG&A expenses, as a percentage of total revenues, climbed 60 basis points to reach 19.3%. This upward trajectory follows a pattern of expense growth in the preceding three quarters, with increases of 2.4%, 5.3% and 3.5%, respectively. Its cost of sales inched up 0.5% in the fiscal first quarter of 2025 due to an increase in compensation cost.

Stocks to Consider

Some better-ranked companies are discussed below.

Graham Corporation GHM currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GHM delivered a trailing four-quarter average earnings surprise of 101.9%. In the past 60 days, the Zacks Consensus Estimate for Graham’s fiscal 2025 earnings has increased 8.4%.

Crane Company CR presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 7.6%.

In the past 60 days, the consensus estimate for CR’s 2024 earnings has increased 1.2%.

RBC Bearings Incorporated RBC currently carries a Zacks Rank of 2. RBC delivered a trailing four-quarter average earnings surprise of 2.5%.

In the past 60 days, the consensus estimate for RBC Bearings’ fiscal 2025 earnings has increased 2.3%.

Zacks Investment Research

Parker-Hannifin Corporation PH has been benefiting from strength in the Aerospace Systems segment, driven by solid momentum in commercial and military end markets. Segmental organic revenues jumped 17.2% year over year in the first quarter of fiscal 2025 (ended Sept. 30, 2024), supported by strength across both OEM and aftermarket channels.

In the quarters ahead, the segment is expected to benefit from solid demand for its products and aftermarket support services in general aviation and military end markets. The company expects the Aerospace Systems segment’s organic sales to increase 10% from the year-ago level in fiscal 2025 (ending June 2025).

The company intends to strengthen and expand its businesses through acquisitions. Its acquisition of Meggitt expanded its presence in the United Kingdom, thereby positioning it well to provide a broader suite of solutions for aircraft and aero-engine components and systems. Acquisitions boosted the company’s sales by 2.6% in fiscal 2024.

The company’s portfolio reshaping actions also include disposing of non-profitable businesses. In November 2024, it divested its composites and fuel containment business for $560 million and a non-core filtration business within the Diversified Industrial Segment for $66 million. This will enable PH to rebalance its portfolio toward its core Aerospace business.

PH remains committed to rewarding its shareholders through dividend payouts. For instance, in fiscal 2024, it rewarded shareholders with dividends of $782 million, indicating an increase of 11% year over year. Also, it hiked its quarterly dividend rate by 10% in April 2024.

PH’s Price Performance

In the past three months, this Zacks Rank #3 (Hold) company's shares have gained 20.9% compared with the industry’s 13.5% growth.

Despite the positives, the company has been witnessing challenging conditions in off-highway and transportation end markets, which have been hurting its Diversified Industrial segment’s performance. The segment’s organic sales fell 4.5% year over year in the first quarter of fiscal 2025.

Also, a weak liquidity position remains a concern for the company. Exiting the fiscal first quarter, the company had cash and cash equivalents of $371.1 million, much lower than its short-term debt of about $3.5 billion.

Stocks to Consider

Some better-ranked companies from the same space are discussed below:

Kadant Inc. KAI presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It has a trailing four-quarter average earnings surprise of 17.2%. The Zacks Consensus Estimate for KAI’s 2024 earnings has improved 1.8% in the past 60 days.

RBC Bearings Incorporated RBC presently has a Zacks Rank of 2 and a trailing four-quarter earnings surprise of 2.5%, on average. The consensus estimate for RBC’s 2024 earnings has increased 2.4% in the past 60 days.

Generac Holdings GNRC presently carries a Zacks Rank of 2. GNRC delivered a trailing four-quarter earnings surprise of 10.8%, on average. The Zacks Consensus Estimate for Generac Holdings’ 2024 earnings has increased 5.1% in the past 60 days.

Zacks Investment Research