Over the last six months, Graco’s shares have sunk to $74.99, producing a disappointing 10.1% loss - a stark contrast to the S&P 500’s 6.3% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Graco, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Graco Not Exciting?
Even with the cheaper entry price, we’re cautious about Graco. Here are three reasons why GGG doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Graco’s sales grew at a tepid 5.4% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Graco’s unimpressive 6.2% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Graco’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Graco’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 23.4× forward P/E (or $74.99 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We’re fairly confident there are better investments elsewhere. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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