Graco (GGG)

Fluid and coating equipment company Graco (NYSE:GGG) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 7.3% year on year to $528.3 million. Its non-GAAP profit of $0.70 per share was 3.9% above analysts’ consensus estimates.

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 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.

Other companies offering fluid handling or dispensing products include Carlisle Companies (NYSE:CSL), Nordson (NASDAQ:NDSN), and Flowserve (NYSE:FLS).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Graco’s 5.9% annualized revenue growth over the last five years was tepid. This was below our standard 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 performance shows its demand has slowed as its revenue was flat over the last two years.

We can better understand the company’s revenue dynamics by analyzing its most important segment, Contractor. Over the last two years, Graco’s Contractor revenue was flat. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, Graco grew its revenue by 7.3% year on year, and its $528.3 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months. Although this projection indicates its newer products and services will catalyze better top-line performance, it is still below the sector average.

Graco has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 51.8% gross margin over the last five years. Said differently, roughly $51.82 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Graco produced a 52.6% gross profit margin in Q1, marking a 1.5 percentage point decrease from 54.1% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

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 27%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Graco’s operating margin rose by 2.2 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Graco generated an operating profit margin of 27.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Graco’s EPS grew at a decent 9.3% compounded annual growth rate over the last five years, higher than its 5.9% annualized revenue growth. This 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 was flat this quarter but expanded by 2.2 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 shorter period to see if we are missing a change in the business.

For Graco, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q1, Graco reported EPS at $0.70, up from $0.65 in the same quarter last year. This print beat analysts’ estimates by 3.9%. Over the next 12 months, Wall Street expects Graco’s full-year EPS of $2.81 to grow 7.5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Graco has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 18.2% over the last five years.

Taking a step back, we can see that Graco’s margin expanded by 4.2 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Graco hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 31.8%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Graco’s ROIC averaged 3.9 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Graco is a profitable, well-capitalized company with $536.1 million of cash and $42.45 million of debt on its balance sheet. This $493.7 million net cash position is 3.7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Graco beat analysts’ EPS expectations this quarter. We were also happy its revenue was in line with Wall Street’s estimates. On the other hand, its Contractor revenue missed. Overall, this quarter had some key positives. The stock remained flat at $78.97 immediately after reporting.

Updated: May 16, 2025 at 11:28 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Graco.

Graco’s business quality ultimately falls short of our standards. For starters, its revenue growth was uninspiring over the last five years, and analysts don’t see anything changing over the next 12 months. And while Graco’s admirable gross margins indicate the mission-critical nature of its offerings, its diminishing returns show management's prior bets haven't worked out.

Graco’s P/E ratio based on the next 12 months is 28.9x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $88.03 on the company (compared to the current share price of $87.04).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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