Earnings estimates have fallen sharply for Gorman-Rupp (GRC - Snapshot Report) following a big Q1 miss. A sharp drop in oil and gas production hurt sales and margins in Q1.

The negative estimate revisions have been significant enough to send shares of Gorman-Rupp to a Zacks Rank #5 (Strong Sell). That puts the stock in the bottom 5% of all companies that Zacks ranks based on earnings momentum.

The Gorman-Rupp Company designs and manufactures pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications.

Its product line consists of pump models ranging in size from 1/4" to nearly 15 feet and ranging in capacity from less than one gallon per minute to nearly one million gallons per minute.

First Quarter Results

Gorman-Rupp reported disappointing first quarter results on April 23. Earnings per share came in at $0.28, missing the Zacks Consensus Estimate of $0.41. It was a 26% decline from the same quarter last year.

Net sales fell 10% to $99.233 million, well below the consensus of $119 million. This was due to "the extremely rapid decline in oil and natural gas production, combined with adverse winter conditions." The gross profit margin fell 934 basis points to 24.1% of net sales.

Despite the revenue drop, S,G & A expenses rose 3.5% year-over-year. As a percentage of net sales, S,G & A jumped from 11.7% to 13.4%. These factors led to a 28% drop in operating income year-over-year.

Meanwhile, total inventories jumped 8% year-over-year, due to a 154% increase in finished products. This suggests that the company may face sales and margin headwinds in the upcoming quarters too.

Estimates Falling

Following the big Q1 miss, analysts lowered their earnings estimates for both 2015 and 2016. The agreement and magnitude of estimate revisions was significant enough to send shares of Gorman-Rupp to a Zacks Rank #5 (Strong Sell).

The 2015 Zacks Consensus Estimate is now $1.38, down from $1.56 before the report. The 2016 consensus is currently $1.41, down from $1.51 over the same period.

Valuation

Shares of Gorman-Rupp do not look like a value here. Its 12-month forward P/E ratio is around 21, above its 10-year historical median and the industry median. Its enterprise value to cash flow ratio of 15 is also above both its historical and industry medians.

The Zacks Value Style Score for Gorman-Rupp is a 'D'.

The Bottom Line

With falling sales, profit margins and earnings estimates, and with soaring inventory and a lofty valuation, investors should look elsewhere for now.

Get the latest research report on GRC - FREE