Inflation-Proof H.B. Fuller Is Ready To Rebound H.B. Fuller has proven to be inflation-proof if nothing else. The company manufactures adhesive chemicals for 3 end markets and the demand is high despite a series of pricing increases....

Pricing No Deterrent To H.B. Fuller Results

H.B. Fuller (NYSE: FUL) has proven to be inflation-proof if nothing else. The company manufactures adhesive chemicals for 3 end markets and the demand is high despite a series of pricing increases. The pricing increases are coupled with volume growth as well, not something we're seeing in most reports, and has revenue and earnings at record levels. In this light, we think the dividend is not only safe but should be expected to grow as it has been doing for the last two decades. The payout isn't large at 1.25% but it is incredibly safe at only 17% of the earnings. The risk is in the broader economy, if the FOMC sparks a recession demand may slacken but we see the opportunity for significant margin expansion in this scenario as well.

"H.B. Fuller has implemented annualized price adjustments of approximately $330 million in the first half of 2022, including over $200 million in the second quarter, and is planning additional annualized increases of over $175 million in the third quarter. When combined with annualized price increases of approximately $450 million executed in fiscal 2021, the company's total pricing actions are anticipated to more than offset raw material and delivery cost increases. The company is prepared to implement further increases as necessary," said the company in its press release.

H.B. Fuller Bottoms On Strong Results

H.B. Fuller had a strong, record-setting quarter in fiscal Q2 driven by a 3.4% increase in volume and an 18.5% in YOY pricing increases. The company posted revenue of $993.26 million or up 20.0% from last year and beat the analyst's consensus by nearly 300 basis points. All three global business units saw at least mid-teens growth led by a 24.5% increase in Hygiene, Health, & Consumables. The Engineering segment grew by 21.8% and was trailed by the Construction segment.

Moving down the report, there was some margin compression from last year but it was expected and less than predicted which left earnings up in all comparisons. On the bottom line, the adjusted $1.11 is up about 15% from last year and beat the Marketbeat.com consensus by $0.04 and this is compounded by the expectation for a return to normalized margins before the end of the year.

Turning to the guidance, the company is expecting an adjusted EPS of $4.10 to $4.35 which is favorable relative to the analyst's consensus going into the report and the 2nd time guidance was raised this year. The analysts have since upped their targets to a consensus near the midpoint of the range which we think is favorable to the price action. Assuming the company's demand holds up over the next two quarters there is a significant opportunity for upside surprise relative to the consensus.

The Analysts Are Iffy On H.B. Fuller Results

At least two analysts have come out with commentary since the Q2 report was released and the news is iffy. The two commentaries include two price target reductions and a downgrade that may cap gains in the near term. The new targets are $72 and $52 compared to the Marketbeat.com consensus target of $71. The consensus target is worth about 15% of upside and is consistent with recent resistance. Price action has steadied in the wake of the release and downgrade but there is a risk of another downdraft in prices. If the stock can not maintain support at the $60 level it may fall to $50 where it would provide an even deeper value than the 14.6X earnings it trades for now. Assuming the market is able to hold the price at the current level, we see this stock moving back up into the $70 to $80 range.