New Products And COROB Integration Will Strengthen US Market Position

Key Takeaways

• New products and strategic U.S. manufacturing position Graco to increase market share and improve net margins amidst trade tensions.
  
• Integration of acquisitions and share repurchases aim to enhance revenue and shareholder value, supporting earnings growth.
  
• Tariff impacts, acquisition costs, and market dependencies pose risks to Graco's profitability and revenue growth amid uncertain trade policies and market conditions.

Catalysts

Designs, manufactures, and markets systems and equipment used to move, measure, mix, control, dispense, and spray fluid and powder materials in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• Graco is focused on increasing its market share by launching new products in the Contractor segment over the next few quarters, which is expected to drive revenue growth as new products gain traction.
  
• The strategic decision to maintain a strong U.S. manufacturing footprint may give Graco an advantage over competitors who manufacture offshore, especially in light of ongoing trade tensions and tariffs, potentially improving net margins due to cost control and pricing power.
  
• The company is expecting benefits from the integration of the COROB acquisition, aiming to capture more revenue and expand its presence in North America, which should contribute to earnings growth.
  
• Efforts to mitigate tariff impacts by qualifying additional suppliers and potentially redesigning products may stabilize or reduce cost of goods sold, supporting net margins over the coming quarters.
  
• Graco's active share repurchase program potentially boosts earnings per share, as evidenced by significant buybacks year-to-date, anticipating reduced share count and enhancing shareholder value.

Graco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Graco's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.3% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $641.7 million (and earnings per share of $3.87) by about September 2028, up from $482.6 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 28.2x on those 2028 earnings, down from 29.1x today. This future PE is greater than the current PE for the US Machinery industry at 24.7x.
• Analysts expect the number of shares outstanding to decline by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Graco Future Earnings Per Share Growth

Risks

• Tariffs and trade policies, especially those between the U.S. and China, pose a risk of decreasing revenues by 1% to 2%, as well as impacting the cost of goods sold due to potential tariffs on imports and retaliatory tariffs on exports.
  
• A combination of diminished gross margins due to higher product costs and lower factory volumes, along with the impact of acquisitions, could strain the net margins.
  
• Declining contractor segment operating margin rates, partly due to acquisitions and lower sales, might affect overall profitability.
  
• Dependence on inventory adjustments and strategic pricing actions to mitigate tariff impacts introduces uncertainty, which might lead to fluctuating earnings.
  
• Exposure to shaky professional paint and EMEA markets might limit growth opportunities and impact future revenue streams.

Valuation

• The analysts have a consensus price target of $92.444 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 $79.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $641.7 million, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of $84.77, the analyst price target of $92.44 is 8.3% higher. 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.