Graco Expects Low-Single-Digit Core Revenue Growth in 2023

Equity Analyst

Krzysztof Smalec

Graco is a wide-moat industrial firm that has consistently delivered returns on invested capital above 20%. The company differentiates itself by manufacturing specialized products that handle difficult-to-move liquids, often used for niche applications where competition is limited. The firm offers a wide array of products, including pumps used to move peanut butter or caramel, automotive paint spray systems, and injection pumps for the oil and gas industry.

Graco generates half of its sales from nearly 63,000 products of which it sells no more than one per day on average. Graco’s relentless cost control and commitment to lean manufacturing allow it to leverage shared components across different product lines to operate its plants efficiently and lower the overall cost of its products. The high-mix, low-volume nature of the business and the relatively small size of many niche end markets act as a barrier to entry, as rivals would struggle to establish the scale needed to challenge Graco’s competitive position.

While Graco is a high-quality business protected by a wide economic moat, the main challenge we see is generating growth, as the firm mostly competes in mature end markets growing at low-single-digit rates. Historically, Graco’s organic growth rate has outpaced GDP growth thanks to its commitment to research and development, which has allowed the company to generate additional sales by developing new products, penetrating adjacent markets, and capturing market share from competitors. We think that Graco can continue to increase sales 100-200 basis points faster than GDP growth thanks to its strategic initiatives, and we project mid-single-digit average organic sales growth over the next five years.

To achieve its 9%-10% annual revenue growth target, management will have to rely on mergers and acquisitions. So far, Graco has largely avoided overpaying for M&A and managed to use a steady stream of tuck-in acquisitions to boost growth without diluting ROICs, which gives us comfort that management will remain prudent. But the strategy carries execution risk if the firm struggles to find targets at attractive prices.

Business Strategy & Outlook

We award Graco a wide economic moat rating primarily due to customer switching costs and secondarily due to intangible assets. Graco is a leading manufacturer of equipment used for managing fluids, and its portfolio includes a wide array of niche products with little direct competition. The firm specializes in moving materials that are abrasive, viscous, or corrosive, which inherently create more wear and tear on pumps and other equipment. Graco’s engineering capabilities, reputation for quality, and experience with handling difficult-to-move liquids are key differentiators that have allowed it to establish a strong competitive position across all the markets it competes in.

Graco has a large installed base of equipment that is protected by customer switching costs. Many of its products perform mission-critical functions and are integrated as part of a customer’s production process. As such, a strong record of reliability is crucial to win business, considering the risk of product failures leading to unplanned outages or wasted material. Furthermore, since Graco’s equipment often accounts for a relatively small portion of a customer’s total production costs (for instance, a paint system at an auto assembly plant), the potential cost of unscheduled downtime could far outweigh any cost savings from switching to a cheaper but less proven alternative.

Graco also benefits from a relatively high level of recurring revenue. The company generates roughly 40% of its sales from aftermarket parts and accessories tied to its installed base. Abrasive fluids create constant wear and tear on equipment, creating a steady demand for replacement parts (for example, spray gun tips). This creates a steady stream of recurring revenue that generates relatively high margins and helps smooth out demand in cyclical end markets. Graco holds high levels of inventory to ensure that replacement parts are readily available and offers same-day shipping on most products, which helps retain customers.

Graco’s wide moat is also protected by intangible assets, including its strong brand name, patent portfolio, and reputation for quality, which allow the company to command premium pricing. Moreover, the firm has established itself as a leader in innovation, spending roughly 4.5% of sales on research and development, nearly 3 times as much as its competitors. Not only does Graco’s continuous investment in innovation fend off competitors, it has allowed the company to gain ground on its rivals. For example, while many peers cut R&D spending during the Great Recession, Graco increased it from $30 million in 2007 to roughly $38 million in 2008 and 2009, which allowed the company to capture market share during the recovery. Given its healthy balance sheet and strong cash flows, Graco has ample liquidity to continue funding its R&D even during an economic downturn, and we believe that its commitment to innovation will make it difficult for rivals to undermine Graco’s competitive position.

A unique aspect of Graco’s business is the breadth of its portfolio. The firm derives roughly half of its revenue from nearly 60,000 different stock-keeping units it sells on average no more than once a day. The high-mix, low-volume nature of the business makes the company’s moat difficult to assail, as it would be challenging for a new entrant to replicate Graco’s long-standing customer relationships, distributor network, and wide array of products to establish sufficient scale to compete effectively.

Graco’s wide moat has allowed it to generate lucrative returns on invested capital, which have averaged around 25%, or nearly 3 times its cost of capital, over the last decade. The company operates in niche industries with high barriers to entry, and we believe that its reputation for quality, manufacturing excellence, and continuous innovation will make it challenging for rivals to breach its moat. As such, we believe that Graco’s wide moat will help the firm continue outearning its cost of capital for many years to come.

Wide

Economic Moat

Graco

Graco, Inc. is a manufacturing company, which designs, manufactures and markets systems and equipment used to move, measure, control, dispense and spray fluid and powder materials. It operates through the following segments: Industrial, Contractor and Process. The Industrial segment includes the Applied Fluid Technologies and Industrial Products divisions. It markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives, and other fluids. The Process segment markets pumps, valves, meters, and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants, and other fluids. The Contractor segment equipment includes sprayers that apply texture to walls and ceilings, highly viscous coatings to roofs and markings on roads, parking lots, athletic fields and floors. The company was founded by Russell Gray and Leil Gray in April 1926 and is headquartered in Minneapolis, MN.

Earnings data Q4 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Graco, Inc. is a manufacturing company, which engages in the design, manufacture, and sale of systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials. It operates through the following segments: Industrial, Process, and Contractor. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives, and other fluids. The Process segment includes pumps, valves, meters, and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants, and other fluids. The Contractor segment offers sprayers that apply texture to walls and ceilings, and highly viscous coatings to roofs and markings on roads, parking lots, athletic fields, and floors. The company was founded by Russell Gray and Leil Gray in April 1926 and is headquartered in Minneapolis, MN.

Graco's (GGG) advanced Graco GCI can be used for both construction and mining maintenance jobs and its durable design reduces the number of injector replacements.

Graco (GGG) Unveils GCI Series Automatic Cartridge Injector

Here is how Graco Inc. (GGG) and Halma (HLMAF) have performed compared to their sector so far this year.

Are Industrial Products Stocks Lagging Graco (GGG) This Year?

MINNEAPOLIS--(BUSINESS WIRE)--Graco, Inc. launched the GCI™ Series injector platform, the lubrication industry's first cartridge injector that doubles output at a lower cost.

Graco Launches Industry First Automatic Lubrication Injector Technology, GCI™ Series Cartridge Injector

Apple

Accenture Plc

Applied Materials

Amphenol

Costco

Home Depot

Jack Henry & Associates

Lowe's

Mastercard

Monolithic Power Systems

Microsoft

Northrop Grumman

Roper Technologies

Charles Schwab

Sherwin-Williams

Texas Instruments

Visa

Vanguard Dividend Appreciation ETF

There are 18 stocks on my dividend growth watchlist for March 2023. More than half of the stocks on my watchlist for this month are currently undervalued based on dividend yield theory.

Dividend Growth Stock Watchlist - March 2023

Graco (GGG) is benefiting from robust product categories such as finishing systems and sealant and adhesive equipment in its Industrial segment. Its shareholder-friendly measures are encouraging.

Here's Why You Should Hold On to Graco (GGG) Stock for Now

Graco Inc. (GGG) reported earnings 30 days ago. What's next for the stock?

Why Is Graco Inc. (GGG) Up 1.8% Since Last Earnings Report?

Automatic Data Processing

BlackRock

Fastenal

Thermo Fisher Scientific

There are 21 stocks on my dividend growth watchlist for January 2023. More than half of the stocks on my watchlist for this month are currently undervalued based on dividend yield theory.

Dividend Growth Stock Watchlist - February 2023

Whether you're a value, growth, or momentum investor, finding strong stocks becomes easier with the Zacks Style Scores, a top feature of the Zacks Premium research service.

Why Graco Inc. (GGG) is a Top Growth Stock for the Long-Term

Graco Inc. (NYSE:GGG ) Q4 2022 Earnings Conference Call January 31, 2023 11:00 AM ET Company Participants Kathy Schoenrock - Executive Vice President, Corporate Controller and Information Systems Mark Sheahan - President and Chief Executive Officer David Lowe - Chief Financial Officer and Treasurer Conference Call Participants Deane Dray - RBC Capital Markets Michael Halloran - Baird Saree Boroditsky - Jefferies Will Jellison - D.A. Davidson Joe Ritchie - Goldman Sachs Jeff Hammond - KeyBanc Capital Markets Inc Thomas Johnson - Morgan Stanley Walter Liptak - Seaport Research Operator Good morning, and welcome to the Fourth Quarter Conference Call for Graco, Inc. If you wish to access the replay for this call, you may do so by visiting the company's website at www.graco.com.

Graco Inc. (GGG) Q4 2022 Earnings Call Transcript

Graco's (GGG) Q4 results benefit from solid performance in its Industrial and Process segments.

Graco (GGG) Q4 Earnings & Revenues Beat, Increase Y/Y

Graco Inc. (GGG) delivered earnings and revenue surprises of 7.35% and 1.10%, respectively, for the quarter ended December 2022. Do the numbers hold clues to what lies ahead for the stock?

Graco Inc. (GGG) Beats Q4 Earnings and Revenue Estimates

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE: GGG) today announced results for the fourth quarter ended December 30, 2022.

Graco Reports Record Quarter and Annual Sales and Operating Earnings

Graco (GGG) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Should You Buy Graco (GGG) Ahead of Earnings?

Graco Inc. (GGG) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Graco Inc. (GGG) Reports Next Week: Wall Street Expects Earnings Growth

Graco Inc. (GGG) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

Will Graco Inc. (GGG) Beat Estimates Again in Its Next Earnings Report?

Bank of New York Mellon

U.S. Bancorp

There are 17 stocks on my dividend growth watchlist for January 2023. A little more than half of the stocks on my watchlist for this month are currently undervalued based on dividend yield theory.

Dividend Growth Stock Watchlist - January 2023

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE: GGG) announced today that it will release its Fourth Quarter 2022 earnings after the New York Stock Exchange closes on Monday, January 30, 2023. A full-text copy of the earnings announcement will be available on the Company's website at www.graco.com. Graco management will hold a conference call, including slides via webcast, with analysts and institutional investors to discuss the results at 11 a.m. ET / 10 a.m. CT on Tuesday, January 31, 2023.

Graco Inc. Announces Fourth Quarter 2022 Earnings Conference Call

Abbott Labs

Archer-Daniels-Midland Company

Amgen

Air Products and Chemicals

Apogee Enterprises

Broadcom

Booz Allen Hamilton Hld

Balchem

Franklin Resources

Bristol-Myers

Church & Dwight

Cincinnati Financial

CubeSmart

California Water Service Group

Enterprise Bancorp

Ecolab

Con Ed

Eastman Chemical

Franklin Electric

Kimberly-Clark

Eli Lilly

There were several double-digit boosts in December, with Mastercard and Eli Lilly leading the way with 16% and 15% increases, respectively. Abbott Labs began its second half-century of dividend growth with an 8.5% increase.

BlackRock, Kimberly-Clark Among 13 Companies To Start 2023 With Annual Dividend Increases

Lamb Weston Hlds

Mosaic

Sandstorm Gold

Lamb Weston Holdings, Inc. (LW), Sandstorm Gold Ltd. (SAND), Graco Inc. (GGG) and The Mosaic Company (MOS) recently hiked dividends.

4 Stocks to Watch on Dividend Hikes at the Turn of the Year

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE:GGG), a leading manufacturer of fluid handling equipment, released today its inaugural Environmental, Social and Governance (ESG) report. The report discloses the Company's approach to ESG and the commitments it makes to its people, its communities and the environment.

Graco Publishes Inaugural Environmental, Social and Governance Report

A strong customer base and product investment coupled with a solid backlog level make Graco (GGG) stock worth holding on to. The company's measures to reward its shareholders are also encouraging.

Reasons to Retain Graco (GGG) Stock in Your Portfolio Now

The company's revenue should benefit from the healthy demand in its end markets, strong order backlog levels, and pricing actions. The margins should benefit from stabilization in input cost pressures, pricing actions, and higher margin business mix.

Graco: Good Growth Prospects At A Reasonable Valuation

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE: GGG), a leading manufacturer of fluid handling equipment, announces the release of the Company's next generation electric-operated double diaphragm pump, QUANTM™. The QUANTM pump features a revolutionary new electric motor design that is up to 8X more efficient than a standard pneumatic pump.

Graco Launches QUANTM Pump

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE:GGG), a leading manufacturer of fluid handling equipment, announced today that Laura L. Evanson has been appointed to the newly created role of Executive Vice President, Marketing, effective January 1, 2023.

Graco Names Laura L. Evanson Executive Vice President, Marketing

MINNEAPOLIS--( BUSINESS WIRE )--Graco Inc. (NYSE:GGG), a leading manufacturer of fluid handling equipment, announced today that Claudio Merengo, President, Worldwide Gema, has been appointed an executive officer effective January 1, 2023.

Graco Names Claudio Merengo an Executive Officer

News for Graco Stock (GGG)