Graham Corporation (GHM)

Industrial fluid and energy systems manufacturer Graham Corporation (NYSE: GHM) missed Wall Street’s revenue expectations in Q4 CY2024, but sales rose 7.3% year on year to $47.04 million. The company’s full-year revenue guidance of $205 million at the midpoint came in 1.4% below analysts’ estimates. Its GAAP profit of $0.14 per share was 40% 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).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Graham Corporation’s sales grew at an incredible 17% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Graham Corporation’s annualized revenue growth of 13.9% over the last two years is below its five-year trend, but we still think the results were good and suggest demand was strong.

This quarter, Graham Corporation’s revenue grew by 7.3% year on year to $47.04 million, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12.6% over the next 12 months, similar to its two-year rate. Despite the slowdown, this projection is noteworthy and indicates the market sees success for its products and services.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

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 18.6% gross margin over the last five years. That means Graham Corporation paid its suppliers a lot of money ($81.42 for every $100 in revenue) to run its business.

Graham Corporation produced a 24.8% gross profit margin in Q4, marking a 2.7 percentage point increase from 22.2% in the same quarter last year. Graham Corporation’s full-year margin has also been trending up over the past 12 months, increasing by 5.3 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and 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 1.4% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Graham Corporation’s operating margin might have seen some fluctuations but has generally stayed the same over the last five years, meaning it will take a fundamental shift in the business to change.

This quarter, Graham Corporation generated an operating profit margin of 4.7%, 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.

Graham Corporation’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

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 298% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Graham Corporation reported EPS at $0.14, up from $0.02 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 $0.83 to grow 21.7%.

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 mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.3%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Graham Corporation’s margin expanded by 5.6 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 while its operating profitability was flat.

Graham Corporation burned through $2.11 million of cash in Q4, equivalent to a negative 4.5% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t put too much weight on it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, causing quarter-to-quarter 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 3%, 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. Fortunately, Graham Corporation’s has increased over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Companies with more cash than debt have lower bankruptcy risk.

Graham Corporation is a profitable, well-capitalized company with $30.05 million of cash and no debt. This position is 5.8% 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 liked how Graham Corporation beat analysts’ EBITDA and EPS expectations this quarter. On the other hand, its revenue missed and its full-year revenue guidance fell slightly short of Wall Street’s estimates. This is weighing on shares, and the stock traded down 2.6% to $45.88 immediately following the results.

Updated: May 16, 2025 at 11:05 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Graham Corporation, you should also grasp the company’s longer-term business quality and valuation.

There are several reasons why we think Graham Corporation is a great business. 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. Additionally, 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 31.3x. Scanning the industrials space today, Graham Corporation’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $52.67 on the company (compared to the current share price of $37.29), implying they see 41.2% upside in buying Graham Corporation in the short term.

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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