Graco (GGG) Gains From Product Innovation Despite High Costs

We have issued an updated research report on Graco Inc.GGG on Mar 5.

The company, with a market capitalization of $7.8 billion, currently carries a Zacks Rank #3 (Hold).

Certain growth drivers and headwinds that might influence Graco have been discussed below.

Factors Favoring Graco

Profitability and Share Price Performance: In the fourth quarter of 2018, Graco's earnings increased 26% year over year. Results were driven by solid sales growth, lower tax expenses and roughly 2.7% fall in share count. In the quarters ahead, the company anticipates solid sales performance, cost-reduction moves, pricing actions and lower corporate taxes to boost profitability.

In the past three months, Graco's shares have increased 12.4%, outperforming the industry 's growth of 8%.

Revenue Prospects: In the fourth quarter of 2018, Graco's revenues increased 8% year over year on the back of organic growth and acquired assets. Demand was strong across the majority of end markets served by the company. In the quarters ahead, strengthening end markets and launch of products will benefit Graco. The company launched LineLazer V ES 2000 and LineDriver ES system line stripers in March, and airless spraying technologies - including FinishProTM II 595, Ultra, UltraMAXTM II, TexSpray Mark, GMAX and TexSpray HD - in February.

For 2019, Graco anticipates organic sales to grow in a mid-single digit.

Capital-Allocation Strategy: Graco invests in acquisitions, product development, rewarding shareholders handsomely and capacity expansion. In 2018, the company used $53.9 million for purchasing property, plant and equipment as well as $88.8 million for distributing dividends and $244.8 million for repurchasing 5.7 million shares.

For 2019, the company intends to invest $40 million for rolling out machinery and equipment, and $100-$110 million for facility expansion projects.

Factors Working Against Graco

Poor Valuation and Earnings Estimates: In the past three months, Graco's shares appear overvalued compared with the industry on a price-to-earnings (P/E) basis. The company's P/E is 25.2x versus the industry's 20.2x. Also, the stock's metric is in line with the three-month highest level.

Moreover, the company's earnings estimates for 2019 have been decreased by three brokerage firms and raised by two. Currently, the Zacks Consensus Estimate for earnings is pegged at $2.01, down roughly 0.5% from the 60-day-ago tally of $2.02.

Graco Inc. Price and Consensus

Graco Inc. Price and Consensus | Graco Inc. Quote

Rising Costs: Graco has been dealing with increasing costs and expenses over time. In the last five years (2014-2018), its cost of sales increased 6.8% (CAGR).

Notably, the company recorded 13.6% rise in this metric in the fourth quarter of 2018 due mainly to tariffs on raw materials and higher production costs. For 2019, it expects tariffs to inflate material costs by $25 million. We believe that rising costs, if unchecked, will keep adversely impacting Graco's margins and profitability.

Forex Woes: Graco's international operations exposed it to risks arising from unfavorable movements in foreign currencies as well as uncertainties related to politics, labor market and economic instability. In the fourth quarter of 2019, forex uncertainties adversely impacted sales by 2%. For 2019, the company expects forex woes to affect Graco's revenues and earnings by 1% and 3%, respectively.

Stocks to Consider

Some better-ranked stocks in the industry are Atlas Copco AB ATLKY , Roper Technologies, Inc. ROP and Chart Industries, Inc. GTLS . While Atlas Copco currently sports a Zacks Rank #1 (Strong Buy), Roper and Chart carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

In the past 60 days, earnings estimates for 2019 improved for Atlas, Roper and Dover. Further, earnings surprise in the las t report ed quarter was a positive 42.42% for Atlas, 2.88% for Roper and 12.96% for Chart.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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