Earnings call transcript: Graham Corporation beats Q3 2025 forecasts

Graham Corporation (GHM) reported a strong Q3 FY25, with EPS at $0.43 versus the $0.22 forecast and revenue at $59.3 million, exceeding the $55.83 million expectation, driving the stock up 21.43% to $51 in pre-market trading. Full-year revenue increased 13% year-over-year to $209.9 million, with net income rising to $12.2 million from $4.6 million, supported by growth in the defense sector and strategic investments. The company projects fiscal 2026 revenue between $225 million and $235 million, however, InvestingPro analysis suggests the stock is currently trading above its Fair Value.

Analysis

Graham Corporation (GHM) reported robust financial results for its fourth quarter of fiscal year 2025, significantly outperforming analyst expectations. The company announced an earnings per share (EPS) of $0.43, almost double the forecasted $0.22, and revenue of $59.3 million, surpassing the anticipated $55.83 million by 6.5%. This strong performance led to a 21.43% surge in its stock price to $51 in pre-market trading. For the full fiscal year 2025, GHM achieved revenue of $209.9 million, a 13% year-over-year increase, and a substantial rise in net income to $12.2 million from $4.6 million in the prior year, with adjusted EPS growing 97% to $1.24. The growth was primarily driven by its defense segment, which constitutes 60% of the revenue mix, and strategic investments in automation and new technologies. The company's financial health is underscored by a strong balance sheet, holding more cash than debt, a low debt-to-equity ratio of 0.06, a record backlog of $412 million (83% defense-related), and a book-to-bill ratio of 1.1 for the fifth consecutive year. GHM projects continued growth, with fiscal 2026 revenue guidance between $225 million and $235 million and adjusted EBITDA between $22 million and $28 million, aiming for low-to-mid teens EBITDA margins by fiscal 2027. However, FY26 gross margins are expected to be between 24.5% and 25.5%, factoring in an estimated $2-5 million impact from tariffs and the absence of a prior year's welder training grant. InvestingPro data indicates a "GREAT" overall financial health score of 3.16 out of 5, with strong growth and price momentum, but also suggests the stock is trading above its Fair Value and its RSI indicates overbought conditions.

Key Decisions for Investors

• Investors should acknowledge Graham Corporation's strong Q4 and full-year FY25 performance and positive FY26 outlook, but exercise caution due to the stock trading above InvestingPro's Fair Value and RSI indicating overbought conditions after a significant price surge.
• Monitor the execution of strategic capital expenditure projects, particularly their targeted ROIC of over 20%, and their contribution towards achieving the fiscal 2027 goals of 8-10% organic revenue growth and low-to-mid teens adjusted EBITDA margins.
• Closely track the impact of tariffs on fiscal 2026 margins, developments in the defense sector which forms a significant revenue base, and the company's ability to convert its record backlog into revenue as projected.
• Consider the company's robust financial position, strong growth trajectory, and strategic positioning in the defense market for long-term potential, while remaining mindful of current valuation levels and potential market corrections.