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Key Takeaways
- Graco's shift to a customer-centric structure and recent acquisitions aim to drive growth through improved efficiencies and market expansion.
- Product innovation and increased order activity in key segments indicate positive trends for future revenue and profitability.
- Soft demand and weakness in key markets, particularly China, challenge Graco's revenue and profit margins amid uncertain macroeconomic conditions.
Catalysts
About Graco- Designs, manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide.
- Graco's upcoming shift to a global customer-centric operating structure is expected to drive growth and profitability by improving operational efficiencies and focusing more intently on revenue growth. This restructuring may positively impact revenue and net margins as it allows for a more streamlined market approach and resource allocation.
- The new Expansion Markets division, which aims to drive inorganic growth in new or adjacent markets, is likely to contribute to revenue growth as Graco targets significant acquisitions. This strategic shift positions the company to capture potential earnings from expanding into high-potential markets.
- Recent acquisitions of PCT Systems and Corob are expected to bolster Graco's position in key markets like semiconductor, electronics, and painting. With combined annual revenues of $130 million from these acquisitions, Graco aims to enhance revenue through expanded global presence and product offerings.
- Graco's efforts in launching new products and their favorable reception, particularly in the Contractor segment, are likely to support revenue stabilization and growth. Continued product innovation can contribute to higher sales volumes and potentially improve net earnings.
- Increased order activity in the Process and Industrial segments over the recent six weeks indicates a potential rebound in demand, which, if sustained, could reverse current sales trends and positively impact revenue and profitability going forward.
Graco Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Graco's revenue will grow by 8.5% annually over the next 3 years.
- Analysts assume that profit margins will increase from 22.9% today to 23.9% in 3 years time.
- Analysts expect earnings to reach $651.5 million (and earnings per share of $3.84) by about November 2027, up from $487.3 million today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.1x on those 2027 earnings, down from 30.7x today. This future PE is greater than the current PE for the US Machinery industry at 24.6x.
- Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.
Graco Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Graco reported a 4% decrease in third quarter sales compared to the same period last year, indicating potential challenges in maintaining or growing revenue.
- All segments except Industrial experienced declines, with significant weakness in the Asia Pacific region, particularly China, which is a major market for Graco; this could continue to impact revenue negatively.
- The company experienced an 8% decline in reported and adjusted net earnings, showing risks to maintaining profit margins.
- Reductions in volume have resulted in lower operating and process segment margins, indicating a challenge in sustaining operational efficiency and earnings.
- Soft demand trends and uncertain macroeconomic conditions, especially in key markets like China, pose risks to future revenue growth and profitability.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $86.0 for Graco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $78.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $651.5 million, and it would be trading on a PE ratio of 27.1x, assuming you use a discount rate of 6.7%.
- Given the current share price of $88.51, the analyst's price target of $86.0 is 2.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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