Adhesive maker H.B. Fuller (NYSE:FUL) reported very solid sales growth during its fiscal first quarter. Profit growth was more pedestrian and also more reflective of Fuller's past growth trends. The stock is also bumping up to its recent highs which lessens Fuller's overall investment appeal.
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First Quarter Recap
Fuller's sales increased 10.5% to $375.3 million. Management cited higher volumes and selling prices, as well as strong organic growth of 11%, which was reduced by 0.5 percentage points due to negative currency fluctuations. Fuller operates in over 40 countries and sells its adhesives, sealants, paints and other related chemical products to a wide array of manufacturers. Specific consumer areas that use its products include food and beverage, diapers, doors, windows, appliances and it also serves markets for water filtration and textile manufacturing. Likely customers include Procter & Gamble (NYSE:PG) and Coca Cola (NYSE:KO). Growth was strongest in nearly every geographic market served. Impressively, the North American market grew 11.6% to $150.5 million, or 40% of total sales.
Pretax income jumped 17.1% to $21.8 million. This came despite a special charge of $6.5 million and was due mostly to lower selling costs, which was somewhat surprising given higher commodity costs are reducing gross margins at most firms that rely on basic raw materials to make their goods. Higher income tax expense tempered net income growth to 6.6% as the bottom line reached $15.3 million, or 30 cents per diluted share.
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Outlook and Valuation
For the full year, Fuller expects total sales growth between 6 and 9%. Analysts on average are projecting 28.8% growth, which includes the acquisition of rival business from Forbo, and total sales of $2 billion. The company said to expect earnings in a range of $2.05 and $2.15 per diluted share. Analysts are at $2.17. Based on the earnings expectations, Fuller trades at a forward P/E of about 12.4.
The Bottom Line
Fuller's near-term trends are encouraging, but its historical growth track record isn't that impressive. The same can be said for rivals that include Avery Dennison (NYSE:AVY) and 3M (NYSE:MMM), with Avery really struggling in the face of negative growth trends. Over the past decade, Fuller's sales are up only a couple of percentage points annually while earnings are up a higher, but still a mundane annual rate below 9%. The last three and five year profit trends have been uneven, and sales growth has still been unimpressive in the low single digits.
Clearly, Fuller's future will determine its share price performance going forward, but the past also serves as an indication that its underlying businesses are difficult to grow. The acquisition of Forbo has caught the attention of investors, who have bid it up to its highs over the past year. Prospective investors might want to wait for a pullback before getting more interested in the name.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.