Sun Hydraulics Corporation Earnings Hit by Weakening Demand

By Markets Fool.com

Sun Hydraulics this evening posted first-quarter earnings results. And the manufacturing company's sales and profit numbers both came in slightly below the targets management issued three months ago. Still, the bigger surprise came in the form of a soft outlook for the quarter ahead that suggests weakening demand in the industry.

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Here's a look at how Sun Hydraulics' headline results stacked up against Wall Street's expectations.

Metric Expected Actual
Revenue $55 million $54 million
Profit $0.41 per share $0.39 per share

Source: Yahoo! Finance and Sun Hydraulics financial filing.

First-quarter results
Overall sales fell by 4% while profits sank by 9%. However, both dips were mainly due to foreign currency swings, and not any negative turn in demand. In fact, consistent with management's February forecast, revenue in the United States rose slightly while the rest of the world fell.

U.S. sales were up 1% against the year-ago period. Meanwhile, international revenue -- the majority of Sun Hydraulics' business -- shrank. Europe and Asian markets were both down by 9% this quarter.

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Foreign currency swings also took a bite out of profitability. Gross profit fell from $24 million to $21 million, translating into a 39% gross margin as compared with 42% in the comparable period of 2014.

Soft demand ahead
In the earnings release, management issued a forecast for the second quarter that points to slowing global growth. Sure, the United States market is on track to keep inching higher. But the outlook isn't as strong for the rest of the world. And that's what will end up driving Sun Hydraulics' overall results.

"While we're encouraged that the U.S. PMI continues to operate in positive territory, our second quarter forecast reflects a softening in demand," CEO Allen Carlson said.

Carlson and his executive team now see sales falling to $54 million next quarter as profit slips to $0.35 per share. In contrast, Wall Street analysts had been looking for $61 million in sales and $0.48 in per-share earnings.

The new outlook represents 12% lower sales and 27% lower profit than Wall Street was targeting, which could pressure the stock in trading tomorrow. But for long-term investors, the outlook is a reminder that Sun Hydraulics operates in a cyclical industry that's heavily dependent on economic growth. As management warns in its 10-K report, "continued weakening or improvement in the economy will directly affect orders and influence results of operations."

While executives can't control industry issues, they can work to cut costs while improving the product portfolio. And that's exactly what Sun Hydraulics' team is doing. "We remain agile and ready to adapt to changing business conditions," Carlson said.

Management will hold a conference call with analysts to chat in detail about the first-quarter results at 9 a.m. ET Tuesday, May 5.

The article Sun Hydraulics Corporation Earnings Hit by Weakening Demand originally appeared on Fool.com.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Sun Hydraulics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.