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I thought that about a decade ago Graco company (New York Stock Exchange: JGG) It didn’t really offer a margin of safety, but this position was very conservative. An $80 stock would trade at similar levels as it does today, but that’s not happening It represents the three-for-one stock split that occurred in 2017. Investors have seen good returns, with their investments tripling during this time period.
At the time, Graco was a $1.2 billion company and had impressive EBITDA margins of about 30% of sales. With 60 million shares outstanding, giving the company a $5 billion valuation as a result, the company is valued at approximately 4 times sales and 21 times net earnings. This came after business doubled in the previous decade.
Nearly a decade later, Graco has (almost) doubled its business again and subsequently established Great long-term value for its investors. I like sustained performance and long-term performance amid strong performance balance sheet. Trading at an average multiple of twenty times earnings, this quality is recognized by investors, and I am happy to participate because I recognize this quality, provided the stocks show modest additional pullback.
What now?
Graco products and services enable the management of fluids and coatings in industrial and commercial applications. The company manufactures systems and equipment used to transport, measure, monitor and distribute liquids and powdered materials.
The company generates about 45% of these sales by distributing these products to contractors, and about 30% by catering to industrial customers, while process customers make up the remainder of sales. About 60% of these sales are generated in the Americas, complemented by an approximately equal share from the EMEA and Asia Pacific markets.
Actual products to consider include spray products related to painting, insulation, and decoration. Other forms of equipment and systems include collection equipment, as well as pumps, meters, valves and accessories.
End markets focus largely on the overall construction markets, which are responsible for approximately half of sales, with other notable end markets including industrial, automotive, electronics, etc.
Capture the evaluation
For 2023, the company reported a 2.5% increase in sales to $2.20 billion as the business remains incredibly profitable, reporting operating profits of $643 million, with margins approaching 30% of sales. GAAP earnings of $507 million were approximately $3 per share based on a share count of 172 million shares, with the increase in share count largely due to the stock split, of course. In fact, modest net share repurchases have been implemented since 2015.
Furthermore, the company continues to stand on excellent financial footing, reporting net cash balances of approximately half a billion here. The company has guided for modest sales growth through 2024, with a stock valued at $90 in the spring earning a blue-chip valuation. After rolling back net cash of about $3 per share, the company traded at a high multiple of twenty times earnings.
In April, Graco posted an uninspiring first-quarter earnings report, with first-quarter sales falling 7% to $492 million, with operating profits down 15% to $133 million. Adjusted earnings, which are more similar to GAAP earnings in Graco’s case, fell 11% to $112 million, with earnings per share down nine cents to $0.65 per share. The declines were seen across all business units and geographies, and quite frankly, this was unusual for Graco, while the weakness was also unexpected.
What now?
Currently, the company’s 172 million shares have fallen to the $79 mark, giving the company a $13.6 billion equity valuation, a number that includes a net cash position of nearly $600 million year to date. This values the business at approximately $13 billion, increasing the sales multiple to just over 6 times.
Amid strong net cash balances, the company increased its dividend last year, and now pays a dividend of $1.02 per share, for a modest yield at the prevailing share price, even with shares down 15-20% from their highs of $95. For each share. This means that the stock is now trading at par compared to early 2021.
After backing off net cash holdings of just over $3 per share, an enterprise valuation of about $75 per share results in an earnings multiple of about 25 times — that is, if we assume modest to modest earnings growth from 2023. This will be a tall order post-crisis. . The first quarter was softer, but management confirmed that demand momentum advanced during the second quarter, which bodes well for the current quarter as I do not see any significant risks to the guidance.
Moreover, management claimed that its M&A pipeline is improving, as the company has plenty of scope to pursue deals here, given its strong net cash balances. What’s interesting is the gradual dilution recently, as the company clearly doesn’t feel the need to buy shares (to offset any dilution), but that was based on the first quarter. This may change after shares retreated slightly from peak levels after the end of the quarter.
Although current operating momentum is not strong, Graco Inc. It’s a great long-term value creator and the stock truly deserves a premium. With sluggish stock price performance, multiples have fallen to 25 times earnings, amid a diluted balance sheet. This is getting progressively more urgent, so frankly I would be careful to start a modest position below $70, if shares unexpectedly fell to these levels.
