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Here's Why it is Worth Holding on to Graco Stock for Now

We have issued an updated research report on Graco Inc. GGG on Jul 8.

The company, with a market capitalization of $8.5 billion, currently carries a Zacks Rank #3 (Hold). Below we discussed why it will be prudent for investors to hold on to this stock for now.

Factors Favoring Graco

Strength in Organic Sales: The company’s organic sales performance was quite impressive in the first quarter of 2019, recording growth of 2% from the year-ago quarter. Results benefited from a 10% increase in organic sales of the Process segment, which was largely driven by healthy demand across most of the end markets and product categories.

For 2019, Graco anticipates organic sales growth to be in a mid-single digit, gaining from strengthening end markets, solid product offerings and focus on innovation.

Shareholder-Friendly Policies: The company effectively uses capital for rewarding shareholders handsomely through dividend payments and share buybacks. It is worth mentioning here that it increased the quarterly dividend rate by 20.8% in December 2018 while announced buyback program to repurchase 18 million shares.

In the first quarter of 2019, the company’s dividend payments totaled $26.4 million and share buybacks amounted to $2.4 million.

Expansion Plans: Over time, Graco has been diligently investing for product innovation and enhancing manufacturing capabilities. For 2019, the company planned to use $40 million for rolling out machinery and equipment as well as using $110-$115 million for projects supporting facility expansion. Notably, the amount allocated for facility expansion is higher than the previously mentioned $100-$110 million.

Factors Working Against Graco

Share Price Performance and Valuation: In the first quarter of 2019, the company reported weaker-than-expected results, with earnings and sales lagging respective estimates by 4.1% and 2.6%. Its share price has declined roughly 4% since the release of results on Apr 24.

In the past three months, Graco's shares have declined 1.3% against the industry’s growth of 3.4%.



In addition, the company’s shares appear overvalued compared with the industry over the past three months. The stock’s current P/E is 27.06x, higher than the industry’s current 21.5x and the industry’s three-month highest level of 21.6x.  

Rising Costs: We believe that inflationary environment adversely impacted Graco’s margin profile in the first quarter of 2019. The company’s cost of sales in the quarter increased 2.7% year over year and operating expenses (including product development; selling, marketing and distribution; and general and administrative expenses) grew 0.7%. Gross and operating margins declined 130 basis points (bps) and 170 bps, respectively. Also, interest expenses increased 9.3%.

We believe that rising costs and expenses, if unchecked, will continue to hurt Graco’s profitability in the quarters ahead. For 2019, the company expects tariffs and higher material costs to have an impact of $21 million.

Forex Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted the company’s sales growth by 2%.

For 2019, Graco predicts forex woes to reduce sales by 1% and earnings by 4% while the same are likely to lower sales by 2% and earnings by 4% in the second quarter.

Stocks to Consider

Some better-ranked stocks in the industry are Roper Technologies, Inc. ROP, Chart Industries, Inc. GTLS and RBC Bearings Incorporated ROLL. While Roper currently sports a Zacks Rank #1 (Strong Buy), both Chart Industries and RBC Bearings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 30 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 8.43% for Roper, 16.56% for Chart Industries and 8.36% for RBC Bearings.

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Roper Technologies, Inc. (ROP) : Free Stock Analysis Report
 
Chart Industries, Inc. (GTLS) : Free Stock Analysis Report
 
Graco Inc. (GGG) : Free Stock Analysis Report
 
RBC Bearings Incorporated (ROLL) : Free Stock Analysis Report
 
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