Graco Earnings: Impressive Margin Expansion Across All Three Segments

We’ve increased our fair value estimate for wide-moat-rated Graco GGG to $77 from $75 after the company reported solid third-quarter results, featuring a 15% year-over-year increase in adjusted EPS. The fair value increase reflects our slightly more optimistic near-term operating margin assumptions as well as time value of money.

On an organic constant-currency basis, Graco’s third-quarter sales decreased by 2%, as declines in contractor and industrial more than offset growth in process. Contractor core sales fell 8% due to a slowdown in global construction markets as well as tough year-over-year comparisons in EMEA. Process core sales increased by 9%, including double digit growth in the Americas and EMEA. Lastly, industrial core sales were down 1%, as lower finishing system sales in EMEA more than offset higher project activity in Asia Pacific.

Given a challenging macroeconomic environment, we were pleased by Graco’s 400-basis-point year-over-year operating margin expansion in the third quarter, from 26.2% to 30.2%, driven by higher pricing and lower product costs. All three segments generated operating margins of at least 30%, which we consider impressive given lower factory volumes.

Management reiterated its guidance for full-year 2023 and continues to expect organic revenue growth in the low single digits, which we consider achievable given the firm’s backlog and current order levels. Looking beyond 2023, Graco faces an uncertain macroeconomic environment, but we are encouraged by the firm’s strong momentum in the process segment. Furthermore, we think that management has done a great job driving margin expansion, especially considering revenue headwinds in the industrial and contractor segments.