Graham Corporation (GHM)

Industrial fluid and energy systems manufacturer Graham Corporation (NYSE: GHM) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 20.9% year on year to $59.35 million. The company’s full-year revenue guidance of $230 million at the midpoint came in 1.9% above analysts’ estimates. Its GAAP profit of $0.40 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded when its founder patented a unique design for a vacuum system used in the sugar refining process, Graham (NYSE:GHM) provides vacuum and heat transfer equipment for the energy, petrochemical, refining, and chemical sectors.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems 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.

Competitors offering similar products include SPX Flow (NYSE:FLOW), Gardner Denver (NYSE:GDI), and Chart Industries (NYSE:GTLS).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Graham Corporation’s 18.3% annualized revenue growth over the last five years was incredible. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great 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. Graham Corporation’s annualized revenue growth of 15.6% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Graham Corporation reported robust year-on-year revenue growth of 20.9%, and its $59.35 million of revenue topped Wall Street estimates by 6.6%.

Looking ahead, sell-side analysts expect revenue to grow 7.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

Graham Corporation has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 19.2% gross margin over the last five years. Said differently, Graham Corporation had to pay a chunky $80.79 to its suppliers for every $100 in revenue.

This quarter, Graham Corporation’s gross profit margin was 27%, up 1.1 percentage points year on year. Graham Corporation’s full-year margin has also been trending up over the past 12 months, increasing by 3.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Graham Corporation was profitable over the last five years but held back by its large cost base. Its average operating margin of 2% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Graham Corporation’s operating margin rose by 4 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Graham Corporation generated an operating margin profit margin of 9.3%, up 12.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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.

Graham Corporation’s EPS grew at an astounding 42.3% compounded annual growth rate over the last five years, higher than its 18.3% 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 Graham Corporation’s earnings to better understand the drivers of its performance. As we mentioned earlier, Graham Corporation’s operating margin expanded by 4 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 Graham Corporation, its two-year annual EPS growth of 645% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Graham Corporation reported EPS at $0.40, up from $0.12 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Graham Corporation’s full-year EPS of $1.11 to shrink by 10.4%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Graham Corporation has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.4%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Graham Corporation’s margin expanded by 6.5 percentage points during that time. The company’s improvement shows it’s 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.

Graham Corporation burned through $8.71 million of cash in Q1, equivalent to a negative 14.7% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Graham Corporation has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.2%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

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. Over the last few years, Graham Corporation’s ROIC has increased. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

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

Graham Corporation is a profitable, well-capitalized company with $21.58 million of cash and $6.85 million of debt on its balance sheet. This $14.72 million net cash position is 3.2% 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.

We were impressed by how significantly Graham Corporation blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also excited its full-year EBITDA guidance outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 13% to $47.50 immediately following the results.

Updated: July 9, 2025 at 11:27 PM EDT

Before investing in or passing on Graham Corporation, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Graham Corporation is a rock-solid business worth owning. For starters, its revenue growth was exceptional over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its rising cash profitability gives it more optionality. On top of that, Graham Corporation’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Graham Corporation’s P/E ratio based on the next 12 months is 44.7x. There’s no doubt it’s a bit of a market darling given the lofty multiple, but we don’t mind owning a high-quality business, even if it’s expensive. We’re in the camp that investments like this should be held for at least three to five years to negate the short-term price volatility that can come with high valuations.

Wall Street analysts have a consensus one-year price target of $59 on the company (compared to the current share price of $52.78).