Company Overview: Graco Inc. (NYSE: GGG) is engaged in providing technology and knowhow for managing fluids in industrial and commercial applications. It is also involved in designing, manufacturing, and marketing systems and equipment to measure, control, move, distribute, and spray fluid and powder materials. Founded in 1926, the company is based in Minneapolis, Minnesota.

GGG Details

Acquisition Synergies & Higher Investments in Product Innovations Aid GGG: Graco Inc. (NYSE: GGG) designs, manufactures, and markets equipment and systems, utilized to control, spray, move and dispense fluid and powder materials.  The company products are manufactured in the United Kingdom, United States, Belgium, Italy, Switzerland, Romania, and China. The products are mostly marketed via the company's certified distribution centers. The company has three operating segments, namely (1) Industrial, (2) Process, and (3) Contractor.

The company remains on track to invest in its long-term growth plans of expanding in new markets, acquisitions, new product development, and geographic expansion. The company continues to capitalize on its industry-leading spending on research and development, in order to expand into several new industries. The company has also completed several targeted acquisitions to widen its product offering, grow its manufacturing and distribution capacity, boost its abilities in the end-user markets, and strengthen its geographic presence. The below pictures depict the company’s acquisition in its Industrial and Process operating segments over the last seven year.

Acqusition in Industrial Segment (Source: Company Reports)

Acqusition in Process Segment (Source: Company Reports)

Looking at the period of FY16 to FY20, the company has reported net sales CAGR of 5.6%. Also, the company witnessed a CAGR of 68.6% in its net earnings over a period of 4 years (FY16 to FY20). Bolstering exposure in new markets, acquisition synergies, and product development remain major tailwinds. It is worth mentioning that the company remains dedicated to reward shareholders via dividend pay-outs and share-buyback programs. Particularly, in FY20, GGG paid out dividends worth $117 million and repurchased shares worth $102.1 million. Additionally, in December 2020, the company informed the market that it had increased its quarterly dividend rate by 7.1%. On February 12, 2021, the company declared a quarterly dividend of 18.75 cents per share, payable on May 5, 2021, to is shareholders.

Key Trends (Source: Company Reports)

4QFY20 Key Highlights: During the quarter, the company reported adjusted earnings of 61 cents per share, depicting an increase of 27.1% on a year over year basis, primarily due to decent sales generation and expanded margins. Net sales during the quarter came in at $470.3 million, up by 14.1% year over year. Top-line was boosted by 11% higher volume and price. Further, the acquisition added 1% to quarterly revenues, and changes in foreign currencies had an encouraging impact of ~2%. In 4QFY20, gross profit came in at $244.8 million, up 16.9% on pcp, owing to higher sales volume in the Industrial segment, forex tailwinds and robust price realization. Adjusted operating profit for the quarter went up by 26.8% on pcp and came in at $132.1 million.

On a geographical basis, sales from Americas and Asia Pacific region in 4QFY20 grew by 15% and 22%, respectively, on a year over year basis. However, sales from the Europe, Middle East and Africa region, sales went down 9% on pcp, but increased 1% on a constant-currency basis.

Key Financial Highlights (Source: Company Reports)

Segmental Highlights: In 4QFY20, revenues from the Industrial segment came in at $212.9 million (accounted for ~45.2% of 4QFY20 net revenues), depicting a rise of 9.3% year over year. Revenues from the Process segment’s decreased 6.1% and came in at $83.5 million and accounted for ~17.8% of net revenues in 4QFY20. Lastly, revenues from Contractor segment’s revenues stood at $173.9 million, up 35.2% year over year. The segment’s sales represented ~37% of net revenues in 4QFY20.

Liquidity & Balance Sheet Details: The company’s strong liquidity position adds to its potency. The company exited the quarter with cash and cash equivalents of $378.9 million (as of December 31, 2020). Long-term debt at the end of the quarter came in at just $150 million. During the twelve months ended December 31, 2020, the company recorded net cash flow from operating activities of $394 million. We opine that a robust liquidity position will facilitate it to pay-off debt commitments as well as it will provide higher rewards to shareholders.

Cash Highlights (Source: Company Reports)

Key Metrics: In FY20, Gross, EBITDA and net margins stood at 51.8%, 29.2% and 20%, higher than the industry median of 35.6%, 15.1% and 5.6%, respectively. In FY20, ROE stood at 28.6%, higher than the industry median of 8.8%. Current ratio of the company stood at 3.19x, higher than the industry median of 2.14x. Debt to equity in the same time span stood at 0.13x, lower than the industry median of 0.51x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 44.52% of the total shareholdings, while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 9.68% and 7.78%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Risk Analysis: The company continues to acquire a larger number of companies, which adds to the integration risk. GGG’s Contractor segment depends on a few large customers for a substantial portion of its sales. Hence, loss of any key customers could reduce its sales and impact segment profitability. GGG’s business, financial, and operating conditions highly depend on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. Further, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. The company also faces stiff competition from peers.

Outlook: The company remains well placed to gain from its investments in product innovation and capacity expansion. Notably, to unveil machinery and equipment’s in FY21, GGG intends to invest $115 million, which includes $80 million for the expansion of facilities. GGG expects Corporate expenditure to be ~$30 million in FY21. Further, the company anticipates movements in foreign currencies to positively impact sales and earnings by 2% and 6%, respectively, in FY21. The company remains on track to maintain a decent liquidity position, which, in turn, will aid the company to pursue future acquisitions, enhance shareholder's value and stay afloat in the long run.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~4.58%. The stock made a 52-week low and high of $41.19 and $76.98, respectively. On the technical analysis front, the stock has a support level of ~$64.58 and a resistance level of ~$71.32. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium as compared to its peer’s average, considering the robust results for 4QFY20, resilient business, geographical diversification, and acquisition synergies. We have taken peers like Nordson Corp (NASDAQ: NDSN), IDEX Corp (NYSE: IEX), to name a few.  Considering the company’s decent 4QFY21 performance, geographical expansion, decent outlook, and liquidity position and valuation, we give a “Buy” recommendation on the stock at the closing price of $69.41, up by 1.37% on 24 March 2021.  

GGG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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