H.B. Fuller Raises Guidance, Shares Pop

H.B. Fuller Seals The Deal On Inflation 

If you were worried about inflation taming in the second half of the year H.B. Fuller NYSE: FUL has laid those fear to rest. The report from H.B. Fuller, a manufacturer of specialty adhesive chemicals worldwide, guarantees input costs are going to go up across industrial verticals. The company is raising its guidance due to demand but also due to pricing actions being put into place right now. The reason is simple, not only were input costs and freight already rising but the war in Ukraine is straining the already overburdened supply chain. The goods news is that demand is strong and H.B. Fuller’s business equally so. The bad news is that it will eventually lead to even more aggressive policy action from the Fed but that is a discussion another time. 

H.B. Fuller Rockets Higher After Robust Quarter

H.B. Fuller had a great quarter, don’t get us wrong, we’re just pointing out how the cost of materials is going up and that it will have an impact on the economy. Until then, H.B. Fuller is firing on all cylinders bringing in $856.48 million in net revenue. This is up 18% from last year, 21% organically, with all 3 global business units producing double-digit advances. The revenue beat the Marketbeat.com consensus by 460 basis points as well as produced the second-highest quarterly revenue on record. 

Moving down to the margin, the company reports headwinds are having an impact on margin but pricing efforts, volume leverage, and internal efficiencies were able to offset most of the pain. The best news is that gross margin contracted less than expected and that SG&A declined by 210 basis points to drive leveraged returns on the bottom line. The GAAP earnings of $0.69 are up $0.14 or 25% while the adjusted $0.80 is up 21% and beat by $0.07. 

The best news for H.B. Fuller investors is the guidance. The company says the combination of demand tailwinds and pricing actions intended to offset expected cost increases led them to raise the guidance. The company is now expecting 15% to 20% organic revenue growth compared to the prior 10% to 15% and for adjusted EPS to fall in the range of $4.10 to $4.35 versus the consensus of $4.16. 

“From an H.B. Fuller business perspective, Russia and Ukraine make up less than one percent of our annual revenue, however, these events have dramatically increased the level of supply chain uncertainty and accelerated inflationary pressures in an already fragile environment. We have moved quickly to take additional actions to secure global supply and to strategically price our products aligned with the value we deliver,” said CEO Jim Owens. 

H.B. Fuller Is A Safe 1.0% Yield For Small-Cap Investors

H.B. Fuller pays a safe 1.0% yield and we expect to see the distribution grow if not the yield. The company is paying out a mere 19% of its earnings estimates with earnings outpacing the consensus and guidance on the rise. In that light, we expect to see a 4th year of increases (more like the 24th discounting the pandemic payment pause) at the mid-single-digit rate it has been known for. 

The Technical Outlook: H.B. Fuller Confirms Reversal 

Shares of H.B. Fuller hit bottom a few weeks before the earnings report was released and put in a Vee-bottom. The price action is now up 10% in the pre-market confirming support at the short-term moving average and the reversal pattern. The question now is if it is a reversal from down to up or down to sideways and right now that question is unanswered. Assuming the market follows through on the move and anticipating a pullback or consolidation before it does, we see this stock moving up to retest the all-time highs near $82.50 and possibly setting new ones. If not, this stock may remain range-bound until the near-term headwinds dissipate and a clearer picture of revenue and earnings is in sight.