Fluid and coating equipment company Graco (NYSE:GGG) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 3.2% year on year to $548.7 million. Its non-GAAP profit of $0.64 per share was 15.8% below analysts’ consensus estimates.
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Graco (GGG) Q4 CY2024 Highlights:
- “We continued to experience slower demand across many end markets in the fourth quarter”
- Revenue: $548.7 million vs analyst estimates of $556.8 million (3.2% year-on-year decline, 1.5% miss)
- Adjusted EPS: $0.64 vs analyst expectations of $0.76 (15.8% miss)
- Operating Margin: 23.7%, down from 30% in the same quarter last year
- Market Capitalization: $14.5 billion
“We continued to experience slower demand across many end markets in the fourth quarter," said Mark Sheahan, Graco's President and CEO.
Company Overview
Founded in 1926, Graco (NYSE:GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.
Gas and Liquid Handling
Gas and liquid handling companies possess the technical know-how and specialized equipment to handle valuable (and sometimes dangerous) substances. Lately, water conservation and carbon capture–which requires hydrogen and other gasses as well as specialized infrastructure–have been trending up, creating new demand for products such as filters, pumps, and valves. On the other hand, gas and liquid handling companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Regrettably, Graco’s sales grew at a tepid 5.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Graco’s recent history shows its demand slowed as its revenue was flat over the last two years. We also note many other Gas and Liquid Handling businesses have faced declining sales because of cyclical headwinds. While Graco’s growth wasn’t the best, it did perform better than its peers. 
We can dig further into the company’s revenue dynamics by analyzing its most important segments, Contractor and Process, which are 45% and 24.8% of revenue. Over the last two years, Graco’s Contractor revenue () was flat while its Process revenue (pumps, valves, hoses) averaged 1.5% year-on-year growth.
This quarter, Graco missed Wall Street’s estimates and reported a rather uninspiring 3.2% year-on-year revenue decline, generating $548.7 million of revenue.
Looking ahead, sell-side analysts expect revenue to grow 7.6% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and implies its newer products and services will spur better top-line performance.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Graco has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 26.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Graco’s operating margin rose by 3.2 percentage points over the last five years, showing its efficiency has improved.
In Q4, Graco generated an operating profit margin of 23.7%, down 6.3 percentage points year on year. Since Graco’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Graco’s EPS grew at an unimpressive 7.9% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 5.1% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
We can take a deeper look into Graco’s earnings to better understand the drivers of its performance. As we mentioned earlier, Graco’s operating margin declined this quarter but expanded by 3.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.
For Graco, its two-year annual EPS growth of 2.5% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q4, Graco reported EPS at $0.64, down from $0.80 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Graco’s full-year EPS of $2.77 to grow 11.2%.
Key Takeaways from Graco’s Q4 Results
Graco's revenue and EPS both fell short of Wall Street’s estimates. Management simply stated that the company “...continued to experience slower demand across many end markets in the fourth quarter”. Overall, this was a weaker quarter. The stock traded down 6.4% to $80.51 immediately following the results.
Graco underperformed this quarter, but does that create an opportunity to invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.