Good News For H.B. Fuller Company, Bad News For Everyone Else

H.B. Fuller Is Raising Prices To Offset Inflation 

H.B. Fuller Company NYSE: FUL just added a new twist to the evolving narrative surrounding the Q3 earnings season. The company produced better than expected results and offered positive guidance on the back of pricing increases that are expected to “restore margins”, as the company put it, to their previous levels. What this means for H.B. Fuller is revenue gains and earnings gains. What this means for everybody else is that input costs are going to go up again in the 4th quarter. H.B. Fuller, you see, makes specialty chemicals and primarily adhesive chemicals used by virtually every industry on the planet. This is bad news for the inflationary picture.

H.B. Fuller Beats And Raises; Prices, And Guidance

H.B. Fuller began raising prices on its customers earlier this year and that can be clearly seen in the revenue and earnings. The company reported $826.8 million in net revenue for a gain of 19.6% over last year. The gains beat the Marketbeat.com consensus by 360 basis points on a 16% increase in organic sales. Organic sales are up 10% on volume and 6% on pricing with further pricing actions slated for the current and following quarter. 

Moving down the report, the margin details are a little mixed but are once again better than expected. The gross margin narrowed slightly over the past year but came in above consensus. The impact of volume, volume leverage, and pricing mostly but not completely offset inflationary pressures and drove solid results on the bottom line. On the bottom line, the company reported $0.58 in GAAP earnings and $0.79 in adjusted earnings to beat the consensus by $0.21 GAAP and come in line with expectations at the adjusted level. 

Looking forward, the company is expecting to grow this fiscal year and above the previous expectations. The company revised its guidance for revenue to a range of up 17% to 18%, a full 200 basis points higher than previously indicated. The catch, of course, is that these revenue gains are as much about higher prices as they are about anything else.

“Throughout the quarter, we took strategic steps to serve customers in the face of ongoing raw material and packaging shortages as well as increasing inflationary pressures on logistics, freight, and labor. We have implemented $225 million of annualized pricing adjustments this year and recently announced additional price increases and a surcharge on global shipments effective September 1, 2021,” Jim Owens, H.B. Fuller’s president and chief executive officer.

Yield And Value With H.B. Fuller 

H.B. Fuller is trading at a significant discount to the S&P 500 and many of its industry peers, valued at only 17X this year’s earnings and 14X next year’s. Along with that is a very safe and growing dividend that we can only find one fault with. At 1.1% it is slightly below the S&P 500 average but comes with a much brighter outlook for distribution growth. With earnings on the rise and margins expected to expand, this company is on track for a high single-digit to low double-digit dividend increase at the end of the fiscal year.

The Technical Outlook: H.B. Fuller Rebounds From Fresh Low 

Shares of HB Fuller hit a six-month low just two days before the earnings report was released. This low was driven by the expectation supply chain issues and inflationary pressures would drastically impair results. The reality is that while inflationary pressures and supply chain woes are impacting results, the impact is far less than expected due to pricing increases. This has shares rebounding more than 2.5% in early pre-market action and is on track to regain key support above $62. If price action is able to close above $62, we see the stock trending back up towards its recent highs near $68. If not, H.B. Fuller could be in for a deeper correction.